PepsiCo (PEP +1%) reported mixed Q3 results, leading to a modest increase in its share price. The company, known for its Frito-Lay and Quaker brands, exceeded earnings expectations but missed revenue estimates, showing a slight year-over-year decline when growth was anticipated. Both Convenient Foods and Beverages volumes decreased by 2% year-over-year, highlighting ongoing global challenges in food brands and reduced international beverage consumption.
On a positive note, PepsiCo maintained its FY24 adjusted EPS outlook at $8.15. However, it lowered its organic revenue growth forecast to a low single-digit increase year-over-year, down from the previously projected approximately 4%.
- A struggling North American consumer has been a persistent issue for PepsiCo, affecting its food and beverage volumes throughout FY24. Beverage volumes fell by 3% year-over-year for the second consecutive quarter, influenced by a 5% increase in effective net pricing. Frito-Lay volumes declined by 1.5%, an improvement from the 4% drop last quarter despite rising prices. Quaker volumes decreased by 13%, better than the 17% and 22% declines in the previous two quarters, as supply chain and recall issues eased.
- PepsiCo noted that Lay's gained 3 points in household penetration during Q3 due to strategic investments over the summer. The company plans to extend this strategy to other categories, focusing on Doritos and Tostitos in the next quarter to enhance household penetration and potentially boost volumes.
- In Q3, PepsiCo's overseas beverage portfolio showed a notable trend change, with a 2% year-over-year volume decline due to widespread weakness. Europe was the best performer with flat growth. Convenient Foods volumes remained negative at 2%. Factors like moderate slowdowns in China and Mexico and geopolitical tensions in the Middle East contributed to reduced beverage consumption. PepsiCo anticipates these challenges to continue in the coming months.
- Despite ongoing volume challenges, PepsiCo's supply chain automation and production improvements supported its 15th consecutive earnings beat in Q3, maintaining its FY24 EPS guidance. While near-term demand has been unfavorable, PepsiCo is optimistic about long-term trends, citing Gen Z snacking habits, middle-class growth, and a shift towards mini meals.
PepsiCo's Q3 report, while not exceptional, was sufficient to encourage moderate buying activity. Investors are now looking to competitors' upcoming earnings reports. Coca-Cola (KO, Financial) will release its Q3 results on October 23, and Keurig Dr Pepper (KDP, Financial) on October 24. KO and KDP have recently outperformed PepsiCo in the beverage sector. If this trend continues, PepsiCo's stock could decline. However, for now, investors are pleased with the improvement in Frito-Lay volumes and the potential stabilization of North American beverage volumes.
