Global beverage and snack giant PepsiCo (PEP, Financial) released its third quarter 2015 earnings result early this week. The company’s shares went up 1.5% to $97.23 after it disclosed revenue and profit figures that beat Wall Street estimates.
PepsiCo’s success is the result of its strategy to expand the product line into snacks. In the beverage unit, PepsiCo has been constantly innovating and investing in healthier options to appeal to health-conscious consumers. Americans' tastes and preferences have changed over the years, as consumers have moved away from soft drinks. As such, the beverage giant considered a shift in its core business offerings.Â
By the numbers
PepsiCo generated an adjusted $1.35 earnings per share in the third quarter on $16.33 billion of revenue. Both the top and bottom lines fell from the year-ago quarter. Revenue declined 5%, while earnings declined by 1 cent per share. This is PepsiCo's fourth consecutive quarter of declining sales.
The primary reason behind the drop is adverse currency fluctuations. The appreciating U.S. dollar compared with other international currencies has corroded global revenue and negatively impacted earnings growth. If the effects of foreign exchange are excluded, PepsiCo’s quarterly performance was a good show, with organic revenue growing 7.4% and EPS increasing 14%.
Despite the impact of currency fluctuation, PepsiCo topped analyst expectations of earnings per share at $1.26 and $16.15 billion in revenue. Such a strong show on both the metrics is the reason why PepsiCo’s shares soared after the earnings release. In addition, the company also lifted its annual earnings outlook from 8% to 9%.
PepsiCo’s free cash flow guidance for 2015 stands at approximately $7 billion. The company plans to return around $9 billion to its shareholders through dividends and share buyback program.
Venezuela – A drag on PepsiCo’s results
Several American companies are losing substantially due to the strengthening dollar, as it’s hurting sales in the global market. PepsiCo is no exception. But luckily, the company has done far better than what was expected excluding the currency impact.
PepsiCo deconsolidated its Venezuelan subsidiaries and eliminated their assets and liabilities at the quarter end. Though it’s been an extremely tough market for PepsiCo, the company confirmed that it will continue operations in the country. Venezuela accounted for 2% of PepsiCo's net revenue and 3% of its operating earnings year to date.
U.S. – The bright spot
The snack and beverage giant was able to record solid sales growth in the U.S. The fall in gasoline prices have increased discretionary income. This gave PepsiCo a big lift in the domestic market. The company’s revenue at gas and convenience stores improved 7%. As prices of snacks and drinks are comparatively higher in these stores, it also boosted margins. A beverage analyst at RBC Capital said "If you're selling impulse-driven goods in the convenience store channel, your sales are accelerating."
PepsiCo is gradually shifting away from its traditional offerings that primarily focused on soda, as health conscious consumer preferences have changed dramatically. This has had a favorable impact on the company, as the additional business units have helped in compensating the dull soda sales. CEO Indra Nooyi said at the earnings call "We're not luxury items or high-ticket items. We are basic food and beverage items. So we see a slowdown, but not significant." Overall, the company looks poised for growth.
