Pepsi shares slide to two month lows following mixed results
PepsiCo's Q3 earnings report showed mixed results, with the company delivering core EPS of $2.31, which slightly beat analyst expectations of $2.30, but falling short on revenue at $23.32 billion compared to the estimated $23.8 billion. The slight earnings beat was overshadowed by a decline in overall net revenue, driven primarily by challenges in its North American snack and beverage segments and other global pressures. Despite this, PepsiCo maintained its guidance for full-year EPS of at least $8.15 and adjusted its organic revenue growth outlook to low single digits, down from the previous forecast of approximately 4%.
Breaking down the segments, Frito-Lay North America reported revenue of $5.89 billion, a 1.1% year-over-year decline, missing expectations of $5.95 billion. The decline was attributed to persistent inflationary pressures and higher borrowing costs, which have continued to impact consumer spending and budgets. However, the company noted a sequential improvement in volume trends and remains optimistic about the snack category's long-term potential, expecting the category to recover as investments in value and in-store presence begin to yield results.
Quaker Foods North America faced the steepest decline, with revenue dropping 13% to $648 million, well below the forecast of $672 million. The segment was severely impacted by product recalls and a challenging market environment, leading to a 28% decline in core operating profit. PepsiCo is hopeful that the resumption of recall-affected production will boost Quaker's performance in Q4, signaling potential recovery in this struggling division.
PepsiCo Beverages North America saw modest growth, posting a 1% increase in organic revenue to $7.18 billion, which was slightly below the estimate of $7.28 billion. The segment delivered its fifth consecutive quarter of core operating margin expansion, driven by strategic investments in advertising and marketing. Despite competitive pressures from rivals like Coca-Cola and Keurig Dr Pepper, PepsiCo's beverages division demonstrated resilience, reflecting an increased focus on zero-sugar products and enhanced productivity.
Internationally, PepsiCo's performance was mixed, with Europe leading the gains at a 6% increase in revenue to $3.95 billion, slightly above expectations of $3.93 billion. In contrast, Latin America and the Africa, Middle East & South Asia regions underperformed, with revenues declining 4.6% and 3.9% respectively, missing analysts' expectations. PepsiCo's focus on expanding its global footprint and increasing the presence of local flavors and product varieties remains a key driver for its international growth strategy.
Commentary on inflationary pressures and pricing strategy highlighted that while inflation is expected to moderate in 2024, certain commodity costs may remain elevated, affecting margins. PepsiCo's core gross margin expanded by 110 basis points, and core operating margin improved by 75 basis points, despite rising input costs and increased investments in marketing and advertising. The company plans to counter inflation by enhancing productivity through automation, digitalization, and waste minimization across its supply chain.
Margins have been a mixed story, with improvements in some segments but pressure in others, especially in North America, where inflation and higher borrowing costs weigh heavily on consumer behavior. PepsiCo's emphasis on productivity initiatives and cost management is expected to continue playing a crucial role in mitigating these margin pressures as the company moves forward into the final quarter of the year.
PepsiCo's downward revision of its revenue growth outlook from approximately 4% to low single digits reflects the ongoing challenges in both domestic and international markets. Despite this cautious revenue guidance, the reaffirmation of its EPS outlook at least $8.15 indicates the company's confidence in achieving profitability through disciplined investments and productivity enhancements. As PepsiCo looks to close out the year, its strategic focus will be on delivering consistent value to consumers while navigating inflationary headwinds and intensifying global competition.