How Much Does PepsiCo Spend On Cost Of Sales And SG&A?

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PepsiCo (NASDAQ: PEP) expenses are largely driven by cost of sales, and selling, general and administrative (SG&A) expenses, with both together expected to account for 92% of PepsiCo’s total expenses in 2019. The company spent about 84.4% of its revenues on these two costs in 2018, similar to the level in 2016. This is mainly due to the company’s high-cost bottling business as well as significant spending on marketing and advertising campaigns. However, with the implementation of PepsiCo’s 2019 Productivity Plan, under which PepsiCo will leverage new technology and business models to further simplify, harmonize, and automate processes, and in addition optimize its manufacturing and supply chain footprint, the company’s expenses are expected to decline. Cost of sales and SG&A as a % of revenue is expected to decrease marginally to 84.1% by 2020, which could add about $182 million to the company’s profits, translating into additional earnings of $0.13 per share. Expectations of higher earnings on account of better cost management has led to 24% stock price appreciation in 2019. To understand what is driving changes in each of the company’s major expense components, view the Trefis interactive dashboard – How Does PepsiCo Spend Its Money?

Total Expenses

  • PepsiCo’s Total expenses as a % of Revenue declined from 92.4% in 2017 to 80.6% in 2018, due to tax benefits received.
  • However, due to the very low base, the metric is expected to increase in 2019, however, it will still likely be lower than 2017, as the company is set to benefit from cost reduction as a result of the new Productivity plan.
  • Total expenses as % of revenue is expected to be at 91.4% in 2019 and 91% in 2020.
  • Net income margin is expected to drop to 8.6% in 2019 before rising to about 9% in 2020.

Breakdown of PepsiCo’s Total Expenses

Cost of Sales

  • Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw materials handling facilities, are included in cost of sales.
  • Cost of sales has been increasing over recent years from 44.9% in 2016 to 45.4% in 2018. The metric is expected to go slightly up to 45.5% in 2019, driven by higher commodity costs. However, cost of sales as % of revenue could see a marginal decline in 2020, led by expected stability in commodity prices and the impact of refranchising (conversion of company-owned units to new franchisees) a part of low-margin bottling plants.

SG&A Expense

  • The costs of moving, storing, and delivering finished product, including merchandising activities, are included in selling, general and administrative expenses.
  • SG&A expense has been volatile in recent years, with it increasing in 2018. The metric is expected to remain almost flat in 2019, but could decline in 2020, led by benefits from the productivity plan, under which PepsiCo will leverage new technology and business models to further simplify, harmonize, and automate processes, and in addition optimize its manufacturing and supply chain footprint.

Net Interest Expense

Pension & Other Expense/(Income)

  • Pension and other income has seen a continuous rise in recent years reflecting the impact of discretionary pension contribution to the PepsiCo Employees Retirement Plan A in the United States, as well as the recognition of net asset gains.
  • The metric is expected to continue the increasing trend in the near term.

Tax Expense

  • The company’s effective tax rate turned negative in 2018 due to tax benefits received on account of reorganization of certain international operations, including the intercompany transfer of certain intangible assets. This deferred tax will be amortized over a period of time.
  • The effective tax rate is expected to be around 30% in the near term, as along with the US, the company operates in various high tax jurisdictions.

 

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