Investors were cautiously optimistic heading into PepsiCo's (NASDAQ:PEP) fiscal third-quarter report. While the snack and beverage giant had managed market-thumping growth in each of the prior two quarters of the year, executives predicted significantly weaker results over the short term.
In reality, that slowdown wasn't as bad as management had forecast. And while Pepsi is still seeing challenges in parts of the business -- notably the beverage division -- the consumer staples giant is on track to post robust sales gains for the full year.
Snacks are surging
Pepsi's growth has been a tale of two divisions in recent months, and those general trends didn't change in the third quarter. The snack food segment, home to brands like Doritos and Lays, notched a 1.5% boost in organic volume in the context of significantly higher prices. Those successes meant that organic revenue rose 5.5% to mark an acceleration over the prior quarter's 5% increase. Management had predicted a slowdown instead, and so this result was a pleasant surprise.
Things weren't quite as sparkling on the beverage side of the business, where volume fell 1% and organic sales growth overall hit 3%. This segment improved against the prior quarter's 2% uptick but is still trailing Coca-Cola (NYSE:KO), which last reported a 6% organic sales increase. That gap suggests Pepsi still has plenty of work ahead of it before it can return to the market share growth pace that CEO Ramon Laguarta and his team are targeting.
Profitability still inching lower
Executives told investors to brace for rising spending in the second half of the year, and that's exactly what shareholders saw this quarter. Pepsi poured more cash toward advertising, the manufacturing process, and the broader supply chain.
These initiatives were most pronounced in the Quaker Foods segment, where operating profit fell 11%, and in the beverage division, which saw a 5% decline. Overall, operating profit rose by 2% to translate into slightly lower profitability, given the 4% increase in organic revenue. Pepsi's core operating margin fell by roughly half of a percentage point, or about the same as Coca-Cola's comparable figure.
A brighter outlook
Executives said they were happy with the overall results given the tough comparison with the year-ago period. "We are making good progress against our strategic priorities," Laguarta said in a press release, "and our businesses are performing well as we continue to make the necessary investments ... to propel our future growth."
The good news is that Pepsi finally has some hard numbers it can point to that suggest that these investments are starting to pay off. With organic sales growth up 5% through the first three quarters of the year, it is seeming likely that the company will have no problem reaching its initial 4% growth target for the year. To that end, management effectively raised its outlook on Thursday, saying it now expects to "meet or exceed its full-year organic revenue growth target."
That forecast leaves the door open for Pepsi to approach the 5% expansion rate that Coke is predicting for 2019. Matching that pace would be a big win for the company, especially since its beverage unit is still losing share. Fixing that issue, which is a high priority for Pepsi today, would put the company on an accelerated growth pace that might start eclipsing Coke as soon as 2020.