PepsiCo (NASDAQ:PEP) snapped back from a 3% year-over-year revenue decline in the second quarter of 2020 to an emphatic 5.3% expansion in its top line during the third quarter, as results released Thursday showed.

After adjusting for foreign currency translation and the effects of acquisitions and dispositions, organic revenue improved by 4.3%, bringing total year-to-date organic growth to 3.6% against the comparable period. Net income advanced by 9% against Q3 2019, to $2.3 billion, while diluted earnings per share rose 11%, to $1.65. Below, let's review the key details from the quarter, and touch on guidance, which PepsiCo reinstated in today's report after a brief hiatus.

Close-up of a cup being filled with soda at a self-serve fountain.

Image source: Getty Images.

Strength across segments, and snack distribution prowess

The last three months revealed concerted improvement in PepsiCo's business lines as all segments posted positive organic revenue growth, except for the Africa, Middle East, and South Asia segment, which saw its top line slip by 2%.

Dine-at-home trends driven by the coronavirus pandemic continued to provide a tailwind for Quaker Oats North America, the company's smallest segment, which achieved a revenue gain of 11% versus Q3 2019, to $608 million. PepsiCo's largest business, its North American beverages segment, managed a top-line increase of 6%, to roughly $6 billion, although on an organic basis, sales increased just 3%.

PepsiCo's second-biggest segment, Frito-Lay North America, accounted for the highest impact on the company's income statement this quarter. Reported revenue of $4.4 billion rose by 7%; the segment also generated 7% organic growth. Frito-Lay is benefiting from the same at-home grocery channel trends as Quaker Oats.

What's perhaps less appreciated by investors is that the Frito-Lay snacks business is reaping sales growth due to its capacity to meet demand, during a period in which supply chains across the U.S. are still stretched between consumer packaged goods manufacturers like PepsiCo and their retail customers.

Frito-Lay has long embraced a direct store distribution (DSD) model, versus a centralized warehouse approach, in supplying products to grocery and convenience stores. This method of distribution can be more costly than warehousing, as DSD requires a manufacturer to more frequently dispatch trucks directly to stores. It's also a more labor-intensive model.

However, using DSD, a manufacturer can be more responsive to changes in stock-keeping-unit demand, and can generally be more agile in replenishing stock on behalf of retailers. This model has served the company well, allowing Frito-Lay to tweak offerings on the fly while maintaining an ongoing supply of core items to customers.

Frito-Lay's sales momentum carried through to the bottom line. Its high-margin business generated operating income of $1.35 billion during the quarter, nearly double the contribution of the next-highest segment by profit, North American beverages. As my Motley Fool colleague Demitri Kalogeropoulos observed earlier this week, PepsiCo's earnings were destined to rest on the success of the snacks division this quarter, and once again, Frito-Lay came through.

Looking forward

The consumer staples giant resumed fiscal guidance on Wednesday with an update to its full-year 2020 outlook, which it issued in the fourth quarter of 2019 but had suspended over the last two quarters because of the pandemic. PepsiCo is aiming for its original organic revenue growth target of 4%, which it should reach if current sales momentum continues.

Management now expects 2020 core adjusted earnings per share (EPS) of $5.50, which will represent a small decline from the $5.53 earned in 2019. All in all, investors will probably be satisfied with this benchmark given the volatility of earnings in the first three quarters of the year. Originally, PepsiCo had predicted 7% core EPS growth for 2020.

As for cash flow, management projects $10 billion in operating cash for this year, against a target of $11 million it originally chalked in. PepsiCo intends to generate free cash flow of $6 billion and signaled that it will return $7.5 billion to shareholders, via $5.5 billion in dividends and $2 billion in share repurchases. With decent growth this quarter and a positive outlook in hand, investors bid up PepsiCo shares, though by a slight 1%, at midday.