Pepsi's Frito-Lay Division Faces Challenges Amidst Activist Pressure

PepsiCo's Frito-Lay snacks division is facing challenges due to sluggish demand, high prices, and low exposure to protein-rich options. Analyst Nik Modi believes that fixing these issues will take time, capital, and/or reinvestments that could dilute EPS and/or returns. The division's growth has slowed, and consumers are balking at double-digit price increases. PepsiCo is under pressure from activist investors to innovate and improve efficiency, but Modi argues that these moves do not address the division's most pressing problem.

PepsiCo's (PEP) North American snacking division, led by Frito-Lay, is facing significant challenges that could impact the company's earnings. According to RBC Capital Markets, the division is grappling with a need to lower prices amid volume weakness, which could weigh on the company's earnings PepsiCo's Challenges Within Snacking Business Likely to Weigh on Earnings, RBC Says^[1].

The division's salty snack volumes continue to face pressure, with little indication of sequential improvement. Brands such as Lays, Doritos, and Cheetos are experiencing volume softness, particularly among low- and middle-income consumers, due to affordability issues PepsiCo's Challenges Within Snacking Business Likely to Weigh on Earnings, RBC Says^[1]. Nik Modi, RBC's co-head of global consumer and retail research, highlighted that consumers want to engage with Frito-Lay's brands but are deterred by high prices.

PepsiCo's fiscal second-quarter revenue for its North American foods business, which includes Frito-Lay, increased by 1% year-over-year to $6.48 billion PepsiCo's Challenges Within Snacking Business Likely to Weigh on Earnings, RBC Says^[1]. However, this growth is not sufficient to offset the challenges faced by the snacking division. The company is under pressure from activist investors to revamp its North American beverages and snacks businesses to unlock additional shareholder value PepsiCo's Challenges Within Snacking Business Likely to Weigh on Earnings, RBC Says^[1].

RBC Capital Markets estimates that PepsiCo's third-quarter adjusted earnings per share will be $2.25, with revenue of $23.97 billion PepsiCo's Challenges Within Snacking Business Likely to Weigh on Earnings, RBC Says^[1]. The current consensus on FactSet is for non-GAAP EPS of $2.26 and sales of $23.86 billion. The brokerage has a sector perform rating on the company's stock, with a price target of $145 PepsiCo's Challenges Within Snacking Business Likely to Weigh on Earnings, RBC Says^[1].

In addition to price and volume challenges, the snacking division's growth has slowed due to low exposure to protein-rich options, which are increasingly in demand. Consumers are looking for more protein in their diets, and Frito-Lay products currently miss the mark in this area PepsiCo's Challenges Within Snacking Business Likely to Weigh on Earnings, RBC Says^[1].

PepsiCo has been increasing its stake in natural colors for its products, aiming to remove synthetic dyes. This shift is a multi-year process and involves finding new ingredients, testing consumer responses, and waiting for FDA approval PepsiCo's new challenge: Making its chips and sodas colorful without artificial dyes^[3]. While this move is positive for the company's image, it does not address the immediate challenges faced by the snacking division.

Investors should keep an eye on PepsiCo's upcoming quarterly results, which are expected to be released next week. The company's ability to innovate and improve efficiency in its snacking division will be crucial for its future growth and earnings.