PepsiCo (PEP) Earnings Preview: Navigating Volatility Amid Rising Prices and Global Strategies
PepsiCo Inc. (NASDAQ: PEP), a dominant force in the global food and beverage industry, is poised to release its Q2 earnings report for 2024 tomorrow before the market opens, followed by an earnings call at 8:15 AM ET.
With shares recently touching 2024 lows, investor sentiment appears bearish, setting a lower bar for the company’s upcoming performance. As investors eagerly await the report, several critical themes and dynamics warrant closer scrutiny.
Earnings Expectations and Volume Concerns
The consensus among analysts, according to FactSet, is an adjusted EPS growth of 3% year-over-year to $2.16 and a modest sales growth of 1% to $22.62 billion.
These expectations reflect the ongoing challenges PepsiCo faces, particularly in its core North American market.
Despite stable May CPI for food at home, PepsiCo has continued to increase prices, which has negatively impacted volume growth. Last quarter, PepsiCo's pricing strategy led to higher prices across its North American segments. Frito-Lay and Beverages saw prices increase by 3% and 6%, respectively, resulting in volume declines of 2% for Frito-Lay and 5% for Beverages.
These declines were further highlighted when competitor Coca-Cola (KO) reported flat beverage volume growth in North America for Q1.
International Markets: A Bright Spot
Contrary to the domestic challenges, PepsiCo's international segments have shown resilience. In Q1, food and beverage volumes improved year-over-year in nearly all regions outside North America. This international strength has been a strategic focus for PepsiCo as it seeks to build scale and leverage its global footprint.
The persistent inflation in regions like Latin America has made price increases less impactful compared to the U.S., allowing for better volume performance.
Retail Shelf Space and Market Position
PepsiCo has been navigating complex negotiations regarding retail shelf space, which has slightly impacted growth. CEO Ramon Laguarta noted that these negotiations have concluded, yielding positive outcomes, particularly in Europe and the U.S.
The company has been resetting its snacks and beverages, a process expected to be completed by mid-June, potentially stabilizing its market position.
In the APAC region, primarily China, economic conditions have been challenging, with cautious consumer behavior impacting sales. Nonetheless, PepsiCo remains confident in its market share gains and long-term growth prospects in the region.
Guidance and Inflationary Trends
Guidance will be a critical element of tomorrow's report. In the previous quarter, PepsiCo reiterated its FY24 outlook, forecasting a 4% organic revenue growth and an EPS of $8.15.
The company’s confidence was bolstered by the completion of shelf space resets and anticipated moderation in inflationary pressures toward the year's end.
Investment Implications
With shares at 2024 lows, investor expectations are subdued, creating an environment where positive surprises could drive significant upside. Key areas to watch include:
- Volume Growth in North America: Investors will be keen to see if there has been any improvement in North American volumes, particularly given the recent price hikes.
- International Performance: Continued strength in international markets could offset domestic challenges and underscore the effectiveness of PepsiCo’s global strategy.
- Guidance Adjustments: Any changes to the FY24 guidance could signal the company’s confidence in managing inflation and volume growth.
- Competitive Landscape: Comparisons with upcoming results from Coca-Cola and Keurig Dr Pepper will provide additional context for PepsiCo’s performance and strategic positioning.
PepsiCo's Q2 earnings report will be a critical indicator of how the company is navigating the twin challenges of rising prices and shifting consumer behavior. While the current bearish sentiment sets a low bar, PepsiCo’s strategic initiatives in international markets and retail shelf space could provide a foundation for recovery and growth. Investors should closely monitor the report and subsequent earnings call for insights into the company's performance and future direction, balancing the risks and opportunities in the evolving market landscape.