Food & Beverage

Pepsi's stock jumps as higher advertising spending fuels sales growth and earnings beat

Key Points
  • PepsiCo tops earnings and revenue expectations for its third quarter.
  • The food and beverage giant now expects to meet or exceed its 4% target for organic revenue growth in 2019.
  • Organic revenue grew by 4.3% during the quarter.
PepsiCo CFO Hugh Johnston on Q3 results
PepsiCo CFO Hugh Johnston on Q3 results

PepsiCo on Thursday announced quarterly earnings and revenue that topped expectations, as its increased spending on advertising and marketing paid off for brands like Gatorade.

Shares of the food and beverage giant gained 2.6% in premarket trading.

"Given our performance year-to-date, we now expect to meet or exceed our full-year organic revenue growth target of 4%," CEO Ramon Laguarta said in a statement.

The company reaffirmed its earnings outlook for fiscal 2019. It expects adjusted earnings per share, assuming constant foreign currency exchange rates, to decline by 1%.

Here's what the company reported compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

  • Earnings per share: $1.56, adjusted, vs. $1.50 expected
  • Revenue: $17.19 billion vs. $16.93 billion expected

Pepsi reported fiscal third-quarter net income of $2.1 billion, or $1.49 per share, down from $2.5 billion, or $1.75 per share, a year earlier. The company's strategy for sales growth includes investing more on marketing and advertising its products.

"The increased advertising that we have is causing consumers to shop us more aggressively, and our customers are rewarding us with that [grocery] space because they know that we can help them grow," CFO Hugh Johnston said on CNBC's "Squawk on the Street."

Johnston said that the company is seeing increased financial results as a result of advertising, not just increased sales growth.

Excluding the impact of foreign exchange, restructuring charges and other items, Pepsi earned $1.56 per share, topping the $1.50 per share expected by analysts surveyed by Refinitiv.

Net sales rose 4.3% to $17.19 billion, beating expectations of $16.93 billion. Pepsi's organic revenue also grew by 4.3% during the quarter.

Frito Lay North America, which includes brands like Cheetos and Doritos, saw revenue growth of 5.5%.

"We're gaining share, but the category is also very healthy. Of course, we're a very big part of the category," Laguarta told analysts on the conference call.

Pepsi has been expanding its snack lineup with healthier options, through brands like Bare and Off the Eaten Path. Revenue growth from those healthier snacks and well-known chip brands helped offset the double-digit sales declines of Sabra hummus and guacamole dips. Pepsi owns a 50% stake of the hummus maker through a joint venture with Strauss Group.

Its North American beverage business also performed well, with 3.5% revenue growth. Gatorade improved its market share and saw positive net revenue growth during the quarter. The brand's no-sugar line, Gatorade Zero, which launched in May 2018, surpassed $500 million in retail sales.

Bubly, which the company expects will be one of its next billion-dollar brands, is continuing to gain market share in the flavored sparkling-water category against competitors like La Croix.

Laguarta said that he believes that Pepsi has a "very good portfolio" in North America to address existing and future demand for food and beverages, although he left open the idea of acquiring smaller brands.

Pepsi's most recent acquisition is the $1.7 billion deal for South Africa-based Pioneer Foods. It has not yet closed.

"We're putting capital against a market opportunity that will deliver itself in the next 20 years," Laguarta said.

Read the full PepsiCo earnings release here.

PepsiCo beats on revenue, EPS in Q3
PepsiCo beats on revenue, EPS in Q3