PepsiCo’s Earnings Beat In Q2 2019 Reaffirms Strong Revenue And Profitability Outlook

by Trefis Team
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PepsiCo (NASDAQ: PEP) released its Q2 2019 financial results on July 9, 2019, followed by a conference call with analysts.

Performance Snapshot

  • The company beat consensus estimates for revenues as well as earnings.
  • PEP reported total revenue of $16.45 billion in Q2 2019, marking a y-o-y growth of 2.2% from Q2 2018 and slightly higher than consensus of $16.43 billion. Organic revenue, which excludes the impact of currency fluctuations, was up 4.5%, better than analysts’ expectation of 4.4%.
  • Higher revenue was driven by healthy growth in sparkling water, healthy snacks, and non-carbonated beverages, along with benefits from selling its snacks and beverages in smaller packaging, allowing it to charge more per ounce while appealing to customers who want smaller portions, partially offset by foreign currency headwinds.
  • Adjusted earnings came in at $1.54 per share in Q2 2019, lower than $1.61/share in the year-ago period, driven by higher commodity costs, and higher advertising and marketing expenses.
  • However, earnings of $1.54/share were higher than market expectations of $1.50/share due to effective net pricing and productivity savings.

We have summarized the key announcements in our interactive dashboard – How Did PepsiCo Fare In Q2 2019? In addition, here is more Consumer Staples data.

A Quick Look At PEP’s Revenue Segments

PEP reported revenue of $64.7 billion in FY 2018. The major revenue sources were as follows-

  • Frito-Lay North America (FLNA): $16.3 billion revenue in 2018 (25% of total revenue). FLNA makes, markets, distributes, and sells branded snack foods to independent distributors and retailers.
  • Quaker Foods North America (QFNA): $2.5 billion revenue in 2018 (4% of total revenue). Either independently or in conjunction with third parties, QFNA makes, markets, distributes, and sells cereals, rice, pasta, and other branded products.
  • North America Beverages (NAB): $21.1 billion revenue in 2018 (33% of total revenue). NAB makes, markets and sells beverage concentrates, fountain syrups, and finished goods under various beverage brands.
  • Latin America: $7.4 billion revenue in 2018 (11% of total revenue). PEP makes, markets, distributes, and sells a number of snack food brands and sells ready-to-drink tea products through an international joint venture with Unilever in Latin America.
  • Europe Sub-Saharan Africa (ESSA): $11.5 billion revenue in 2018 (18% of total revenue). Under this segment, PEP sells snacks and beverages along with a number of leading dairy products in the region.
  • Asia, Middle East, North Africa (AMENA): $5.9 billion revenue in 2018 (9% of total revenue). AMENA also makes, markets, distributes, and sells beverage concentrates, fountain syrups, and finished goods under various beverage brands.

A] Revenue Trend

Frito-Lay North America (FLNA)

  • FLNA revenue grew 4.5% (y-o-y) in Q2 2019, driven by volume growth and effective net pricing.
  • Volume growth reflects low single-digit growth in trademark Cheetos, Doritos, and variety packs, partially offset by a double-digit decline in Sabra joint venture products.

Quaker Foods North America (QFNA)

  • Net revenue increased by 2.5% (y-o-y) in Q2 2019, making it the segment’s strongest quarter of organic growth in three years.
  • Volume growth was driven by higher sales of trademark Gamesa and Aunt Jemima syrup, along with ready-to-eat cereals, partially offset by a decline in oatmeal volume.

North America Beverages (NAB)

  • In spite of lower volume, segment revenue increased by 2.5% in Q2 2019 due to effective pricing and Starbucks’ coffee drinks and water business.
  • Along with lower sales of carbonated soft drinks, non-carbonated beverage volume also declined by 1% due to a decrease in Gatorade sports drinks and juice and juice drinks portfolio.

Latin America

  • Net revenue increased by 2.3% in Q2 2019.
  • Snacks volume grew 4%, led by growth in Brazil and Mexico.
  • Beverage sales increased 5% led by Brazil and Guatemala, partially offset by lower demand in Argentina and Honduras.
  • Segment revenue growth was adversely affected by unfavorable foreign exchange movements.

Europe, Sub-Saharan Africa (ESSA)

  • Snacks volume growth of 2% in Q2 2019 was led by Poland, South Africa, Russia, and Turkey, partially offset by decline in the UK and France.
  • Beverage volume witnessed sharp growth of 18%, primarily reflecting a 17 percentage point impact of the SodaStream acquisition and double-digit growth in Nigeria and Poland.
  • However, revenue increased only marginally by 0.5% during the quarter due to a 9 percentage point impact of unfavorable foreign exchange.

Asia, Middle East and North Africa (AMENA)

  • Snacks and beverage volume increased by 6% and 1%, respectively, during Q2 2019, led by higher consumption demand from emerging markets.
  • However, segment revenue declined 1% in Q2 2019 reflecting the impact of unfavorable foreign exchange and refranchising a portion of its beverage business in India in 2019.

B] Expense and Profitability Trend

Total expenses increased by 1% in Q2 2019, driven by higher advertising and marketing expenses, distribution cost and commodity cost, partially offset by lower effective tax rate and productivity savings.

  • Cost of Goods Sold (COGS): After continuously increasing over recent quarters, cost of sales as % of revenue decreased in Q2 2019, benefiting from higher volume sales and cost savings due to the Productivity Plan, partially offset by higher commodity prices.
  • SG&A Expense: SG&A expense increased 9% in Q2 2019 over the previous year levels, mainly reflecting increased spending on advertising and marketing, along with higher distribution costs.
  • Effective Tax Rate: Effective tax rate of 20.4% in Q2 2019 was much lower than 36.9% in Q2 2018, as the company recognized tax benefits totaling $29 million related to the TCJ Act.

In spite of an increase in total expenses, higher net income margin of 12.4% in Q2 2019 compared to 11.3% in the year-ago period was driven by a greater increase in revenue and volumes sold.

Full Year Outlook

  • For the full year, we expect the company’s revenues to grow by 3.0% over each of the next two years to reach $66.6 billion in 2019, and further to $68.7 billion in 2020, driven by growth in the company’s healthy snacks, sports drinks, and non-carbonated beverage portfolio.
  • An effective tax rate of 21% in 2019 (compared to tax benefits received in 2018), incremental investments by the company to strengthen its business, and absence of gains from sale of assets, unlike in 2018, is expected to lead to a sharp drop in net income margin to 8.5% in 2019 from 19.4% in 2018.
  • However, benefits of the recently announced 2019 Productivity Plan is expected to reflect in the year 2020, when net income margins are expected to grow to 8.7%.

Trefis has a price estimate of $128 per share for PepsiCo’s stock.


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