“Healthy” Foods To Drive PepsiCo’s Earnings In The Second Quarter

PepsiCo (NYSE:PEP) is set to report its second quarter earnings on July 11th, before the markets open. While the company has not provided a guidance for the quarter, analysts are expecting earnings of $1.40 per share on revenues of $15.61 billion. The company is aiming for a 3% organic revenue growth this year. However, in the first quarter, the company was only able to deliver 2.1% growth. Keeping this in mind, it is imperative the company exceeds the 3% mark this quarter, otherwise reaching this target may turn out to be a stumbling block in the second half of the year. Adverse currency fluctuations continue to be a hindrance for PepsiCo, as it has a presence in over 200 countries. The company expects a three percentage point drag on the bottom-line from foreign currency translation during the year.

Key Trends To Watch Out For:

1. Gross Margin Contraction

A key factor to look into this quarter would be the gross margins for the company. Earlier this year, the company posted a second straight quarter of declining gross margins, owing to commodity inflation, after a number of periods of commodity deflation. This trend, of rising commodity prices, is expected to continue, which could pressure the margins further. To combat this, the company intends to increase the prices of its products. However, the phasing in of the prices can not happen overnight, and hence, the gross margin contraction is expected to continue in the second quarter, and recover thereafter.

2. Revenue Growth To Continue

After eight consecutive quarters of revenue decline, the company has, in the past two quarters, delivered growth of 5% in the fourth quarter of FY 2016, and 1.6% in the first quarter of this year. In the second quarter, an increase of 1.4% in revenue is expected, to reach $15.61 billion. In the previous quarter, increased pricing favorably impacted the revenues, by two percentage points, partially offset by one percentage point drag of currency headwinds.

3. Focus on “Healthy” Products

Giving a huge push to its “health” initiatives, recently PepsiCo announced its new targets to reduce calories and sugar in its beverages, and salt and fat in its snacks by 2025. As it adapts to changing consumer preferences, PepsiCo believes that healthier products will be key for long term growth and the company is looking at several ways to make its portfolio of products healthier. From organic Gatorade, to offering probiotic health drinks, and lowering sugar in its beverages and salt in its snacks, all these initiatives are aimed at driving sales amid a growing base of health conscious consumers. According to the company, its “everyday nutrition” products will witness the fastest rate of sales growth by 2025.

The primary driver of PepsiCo’s revenues in Q1 2017 was its portfolio of healthy snacks and beverages. As PepsiCo works towards transforming itself to adapt to the changing customer preferences of healthier lifestyles and aims to limit its environmental footprint, the company has adopted a motto of “Performance with Purpose.”  In order to meet the evolving needs of customers globally, the company is shifting its portfolio to a wider range termed as “Everyday Nutrition Products.”  These products contain nutrients such as grains, fruits, vegetables, or protein. This portfolio falls under a broader category of “Guilt Free Products” which also includes beverages which have less than 70 calories from sugar and small serving snacks with low sodium.  The company now derives 45% of its revenues from these “Guilt Free Products” indicating that it has transformed its portfolio towards healthier products according to the new customer preferences.

Have more questions on PepsiCo? See the links below.

• Here’s How PepsiCo Can Benefit From Acquiring Vita Coco
• Home Market And Healthier Options Boost PepsiCo’s Q1 Results

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