PepsiCo 3Q profit climbs on cost cuts

PURCHASE, N.Y. - Soft drinks and snack maker PepsiCo Inc. said Thursday that its fiscal third-quarter profit rose 9 percent, in part on cost-control efforts, even as revenue dropped on weak beverage sales.

The Purchase, N.Y.-based maker of Pepsi cola and Frito-Lay snacks earned $1.72 billion, or $1.09 per share, in the three months ended Sept. 5. That's up from the $1.58 billion, or 99 cents per share, a year ago.

The results beat expectations of analysts polled by Thomson Reuters, whose estimates typically exclude one-time items, forecast profit of $1.03 per share.

Purchase, N.Y.-based PepsiCo Inc., which also sells the Gatorade and Tropicana brands, said its sales slipped 1 percent to $11.08 billion from $11.24 billion. The results fell short of Wall Street's $11.25 billion estimate.

Sales were hindered by weakness in its PepsiCo Americas Beverages unit, which reported a 6 percent drop in volume and a 9 percent revenue decline. The results somewhat reflect a change in shoppers' buying habits, as consumers shift toward juices and teas and away from soft drinks.

CEO Indra Nooyi said consumers are also more focused on cost now, and that's something the company expects to last. She told investors the company is still developing new products that have healthy attributes, targeting key groups like baby boomers, but price is just as important.

"Clearly one part of the effort has to be on launching lower-priced options, and our R&D people are focused on that," she said.

Although there's weakness in the soft drink business, PepsiCo's sales have been helped by strength in its snack business.

The Frito-Lay North America division reported revenue climbed 5 percent in the quarter while volume rose 3 percent. The company said its Lay's brand posted high single-digit growth and its Sabra joint venture and variety packs experienced solid gains. Its effort to add 20 percent extra volume — while keeping price stable — didn't win over many consumers, the company said, as PepsiCo learned bigger packages didn't spur consumers to purchase as much as price did.

CFO Richard Goodman said as each month wore on, consumers had more constrained budgets so PepsiCo offered more promotions at the end of the month to keep spurring sales.

PepsiCo's other major food business, Quaker Foods North America, also posted revenue gains. Food makers in general have benefited during the recession as strapped consumers eat at home more to save money.

The company also saw strength abroad, with sales increases at PepsiCo International and Asia, Middle East and Africa divisions.

Costs fell faster than revenue, with selling, general and administrative expenses down 8 percent to $3.65 billion.

PepsiCo is in the midst of acquiring its largest North American bottlers Pepsi Bottling Group Inc. and PepsiAmericas Inc. The two bottlers accepted a $7.8 billion deal in August, after rejecting an earlier offer for less money.

Analysts say the deal will transform the North American beverage business because it will mean PepsiCo can be quicker to market with new products and even determine how they are positioned on shelves.

The company reaffirmed its full-year guidance for fiscal 2009 of earnings per share growth of mid-to-high single digit growth, if currency stays constant. For fiscal 2010, PepsiCo targets earnings per share growth of between 11 to 13 percent, with currency staying constant.

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