Last Wednesday, PepsiCo (NASDAQ:PEP) announced some of the strongest operating results that investors have seen in years. The snack and beverage giant built upon the positive momentum it showed at the end of 2018 to send sales growth above 5%. Profitability dipped slightly, as expected, as the company dedicated more cash toward bolstering the business.
Those results put the consumer foods titan in a good position to meet its full-year targets, but Pepsi's updated forecast implies slower growth for the rest of the year. In a conference call with analysts, CEO Ramon Laguarta and his team explained the reasons behind that projected deceleration while expressing confidence in their rebound plans.
Below are some highlights from that presentation.
Happy with the performance
We're very pleased with our results for the first quarter.
Executives noted a few metrics that indicated Pepsi's growth was on firm footing this quarter. The 5.2% sales increase marked an improvement over the 4.7% hike from the past six months, as well as the 3.7% jump in the first half of 2018. It was Pepsi's best quarterly growth rate in over three years, they pointed out.
Management called the gains "broad based" since they included higher organic sales across most of its divisions, with Frito-Lay snacks leading the way. Still, the news wasn't uniformly positive, given that sales volumes were down in the U.S. beverage division and in the Quaker Foods segment.
Spending more cash
We invested as planned across our businesses and this included a double-digit increase in advertising and marketing. And our productivity and restructuring actions were implemented according to plan.
Pepsi's 3% core earnings increase trailed its revenue expansion rate, and that reduced profitability was driven by higher spending. The company invested in the supply chain and manufacturing upgrades it spelled out for investors last quarter while also stepping up marketing and advertising outlays.
These projects should lay the groundwork for faster, more efficient sales growth ahead, management explained. And while it's too early to tell if the returns will meet expectations, Laguarta says the team is encouraged about "how our investments are turning into positive operating numbers."
Brace for a slowdown
With both organic revenue growth and core constant currency EPS growth higher in Q1 than in our full-year targets, that implies the growth rate for the balance of the year will be below the Q1 growth rates.
-- CFO Hugh Johnston
The fact that Pepsi simply affirmed its full-year guidance after outperforming this quarter might suggest management is being too conservative in its outlook. However, executives outlined a few reasons for expecting a slowdown over the next few quarters, including the fact that they don't expect the Frito Lay business to repeat the 6% spike this quarter, which they called "extraordinary." Pepsi also is going up against tougher comparisons against the prior-year period, and these get more difficult with each passing month.
Management sees profit trends worsening over the next few quarters as well. Commodity cost inflation should accelerate, and Pepsi is planning to make more aggressive investments in the business over the next few quarters. Put this all together, and it implies the company will just meet the targets it laid out back in February calling for sales growth of around 4% as earnings improve at a slightly slower rate.
From there, management's hope is that Pepsi will be in position to speed up its market share gains while expanding profitability, beginning in fiscal 2020.