PepsiCo’s Earnings Show Refranchising Deals, Restructuring And Currency Headwinds

PepsiCo (NYSE:PEP) reported its Q2 earnings on July 25, and the results were negatively impacted by a combination of factors such as refranchising deals in China and Mexico, expenses related to its multi-year productivity plan (called the ‘Productivity Plan’) and currency headwinds. Total revenue declined 2% to $16.5 billion, but grew 5% on an organic basis. Net income stood at $1.49 billion or 94 cents a share vs $1.17 in the prior year quarter. The management reaffirmed the full year guidance of a 5% decline in EPS, which stood at $4.40 in 2011. ^[1]

PepsiCo has cited 2012 as a transitional year in which it plans to lay off 8,700 workers and boost marketing of its North American beverages. In 2012, the company has so far launched Pepsi Next, a mid-calorie variant of its flagship drink Pepsi, and launched its first ever global campaign called ‘Live for Now’. Volume for beverages rose 2% on an organic basis in the Americas so we might be seeing the beginning of something here. However, snacks volume growth continued to outperform that of beverages. Total snacks volume grew 3% (on an organic basis) while beverage volume could only manage a 1% increase.

We have a price estimate of $69 for PepsiCo, but we are in the process of revising our estimates to incorporate Q2 earnings.

Profitability Hurt

The company incurred an expense of $77 million related to Productivity Plan (restructuring and impairment charges) in the quarter. In the first six months of the year, PepsiCo incurred $110 million expenses related to its multi-year productivity plan. Furthermore, the company expects to incur an additional $315 million of expenses for the remainder of the year, but only $102 million from 2013 through 2015. Thus, we expect the SG&A (selling, general and administrative) expenses to be unusually high for 2012. In the coming years, we expect the figure to decline.

PepsiCo’s commodity bill surged by $350 million, but strong pricing helped mitigate the negative impact of higher cost of goods partially. Gross margins stood at 51.9% compared to 52.6% in the previous year’s quarter. Overall, pricing contributed 4 percentage points to the overall 5 percent organic revenue growth.

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1. Pepsi 10-Q [↩]