PepsiCo's Top Line Sparkles in the First Half of 2019

After two quarters, the snack and beverage titan is on track to meet its mid-single-digit full-year organic revenue growth target.

Asit Sharma
Asit Sharma
Jul 9, 2019 at 4:56PM
Consumer Goods

Consumer packaged goods multinational PepsiCo (NASDAQ:PEP) revealed second-quarter 2019 results on Tuesday that are largely proceeding according to plan. CEO Ramon Laguarta has promised a "faster, stronger, better" organization, and after two full quarters at PepsiCo's helm, Laguarta has ensured that faster is the operative word -- at least on the revenue front. Below, let's review salient details from the last three months, as well as management's outlook for the remainder of the year. Note that all comparative numbers that follow refer to the prior-year quarter.

PepsiCo results: The raw numbers

Metric Q2 2019 Q2 2018 Change
Revenue $16.45 billion $16.10 billion 2.2%
Net income $2.04 billion $1.82 billion 12.1%
Diluted EPS $1.44 $1.28 12.5%

Data source: PepsiCo. EPS = earnings per share.

What happened with PepsiCo this quarter?

  • Organic revenue (i.e., reported revenue adjusted for acquisitions, divestitures, and foreign currency translation) expanded by 4.5% in the second quarter of 2019, after growing by 5.2% in the first quarter. PepsiCo achieved 3.7% organic revenue growth in 2018, and to date, the company is coasting at roughly 1 percentage point ahead of last year's pace.
  • Organic growth was led by 5% expansion in the company's second-largest (and most profitable) segment, Frito Lay North America.
  • Latin America, Europe Sub-Saharan Africa (ESSA), and Asia, Middle East, and North Africa (AMENA) enjoyed organic top-line growth of 10%, 5%, and 5%, respectively, while Quaker Foods North America (QFNA) advanced organic revenue by 3%. PepsiCo Beverages North America (PBNA), the company's largest segment, inched organic revenue forward by just 2%.
  • Total organic volume growth increased 2% across PepsiCo's global portfolio of snacks, and was flat in its beverage businesses.
  • Operating margin declined by 220 basis points to 16.6%, evidence in part of the company's plan in recent quarters to step up marketing expense to support brands in PBNA and increase the speed of retail takeaway (i.e., the rate at which customers purchase products from store shelves) of brands like Gatorade and Mountain Dew.
  • The lower profitability can also be attributed to segment profit declines in QFNA, PBNA, and AMENA of 13%, 7%, and 24% in core constant currency terms, which offset quarterly profits in the remaining segments.
  • PepsiCo was able to report improved net earnings and diluted earnings per share due to income tax expense of $524 million, versus a higher income tax expense of $1.1 billion in the prior-year quarter.
  • The company repurchased $786 million worth of its own shares during the quarter, bringing its year-to-date share repurchase total to $1.73 billion. PepsiCo's capital allocation plan for 2019 calls for $3 billion in share buybacks; thus, investors can expect roughly $1.3 billion in stock repurchase activity in the back half of the year.

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What management had to say

Bottles of Gatorade "G2" sports drink on a store shelf.

Image source: PepsiCo.

In PepsiCo's earnings release, CEO Ramon Laguarta expressed management's satisfaction in delivering core revenue growth, and he also commented on the state of companywide objectives:

We are pleased with our results for the second quarter. While adverse foreign exchange translation negatively impacted our reported net revenue performance, our organic revenue growth was 4.5% in the quarter.

We are also pleased with the progress on our priorities to make PepsiCo a faster, stronger and better company by building new capabilities, strengthening our brands, adding capacity to grow and transforming our culture. Our performance for the first half and the progress we are making on our strategic priorities give us increased confidence in achieving the 2019 financial targets we communicated earlier this year.

As I discussed earlier this year, PepsiCo's strategic priorities largely center on optimizing the company's operations, from improving supply chains to accelerating the introduction of promising products to market. Coupling that with a crisper pace of revenue expansion, the company hopes to effect enough operational improvement to meaningfully boost net earnings over the next few years.

Looking forward

PepsiCo left its 2019 guidance unchanged on Tuesday. The company expects full-year organic revenue growth of 4%. That target is within reach, as PepsiCo is so far tracking closer to an organic growth rate of 5%.

Management anticipates that core diluted earnings per share will decline 1% on a constant currency basis. Given an expected 2 percentage points of foreign exchange translation in 2019, this indicates a decline of 3% from the $5.66 in core earnings per share booked last year. Even as the organization invests in more efficient operations, it doesn't expect to see significant bottom-line improvement until 2020 at the earliest.