PepsiCo earnings top estimates, but North American beverages still struggling

PepsiCo
Chris Rank | Bloomberg | Getty Images
  • PepsiCo reports quarterly earnings and revenue that beat analysts' expectations.
  • The beverage and snack maker has been trying to turn around its lagging Gatorade business.
  • Pepsi's snack business has been outperforming its North American beverage business.
PepsiCo
Chris Rank | Bloomberg | Getty Images
PepsiCo on Thursday reported first-quarter earnings that topped analysts' estimates, but its core North American beverage business continues to struggle.
Here's how the company did compared with what Wall Street expected:
  • Earnings: 96 cents per share, adjusted, vs. 93 cents per share forecast by Thomson Reuters
  • Revenue: $12.56 billion vs. $12.4 billion forecast by Thomson Reuters

"North American beverages sector continues to work through some challenges," CEO Indra Nooyi told analysts during Thursday's earnings call.

"The overwhelming driver is that, despite moderately increasing our media on trademark Pepsi over the past three years, our share ... has fallen dramatically relative to our key competitor, who has substantially stepped up their media spending on colas over the past two years," said Nooyi, according to an initial FactSet transcript.

To address this, Pepsi plans to step up spending on its trademark cola, and improve brand communications as it launches its Pepsi Generations ad campaign.

Coca-Cola has been pouring money into innovating its classic colas as well launching new products. Its January launch of a millennial-focused revamp of its Diet Coke brand helped bring it back to positive volume growth in North America.

Meantime, Pepsi, which has also been working to turn around its popular Gatorade brand, said it is seeing "improved sales performance and trajectories," for the sports drink. It recently launched Gatorade Zero, a version without carbohydrates.

Pepsi shares edged down slightly in premarket trading.

Pepsi has been struggling to balance supporting its newer on-trend drinks while not losing focus on its profit-making but slower-growing core carbonated drinks business, which includes Pepsi-Cola. It highlighted a number of healthier and on-trend drink launches on Thursday, including its at-home drink system, Drinkfinity, and Lipton Iced Tea with a Splash of Juice.

In the quarter ended March 24, Pepsi's net income rose to $1.34 billion, or 94 cents a share, from $1.32 billion, or 91 cents a share, a year ago.

Excluding items, the company earned 96 cents a share, which was better than expected.

Total revenue rose 4.3 percent to $12.56 billion, outpacing estimates of $12.4 billion.

Organic revenue growth, which strips out the impact of currency exchange, rose 2.3 percent.

Pepsi also said Thursday it is evaluating options for its bottling unit, including whether to spin it out. No decisions have yet been made on that front.

Its snack division, Frito-Lay North America, continues to grow, with the unit reporting sales growth of 3 percent.

Profitability of the division, though, was hurt by operating cost inflation, as rising freight and commodity costs ate into margins. Pepsi said it partially offset those costs by lowering its advertising and marketing expenses.

Internationally, Pepsi reported strong growth in Latin America and Europe Sub-Saharan Africa, up 14 percent and 15 percent, respectively.

Pepsi reaffirmed its 2018 outlook. It expects full-year organic revenue growth of at least 2.3 percent — its 2017 growth rate. It expects core earnings per share of $5.70, a 9 percent increase over 2017.