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Why PepsiCo Isn't Worried About Falling Margins

By Demitri Kalogeropoulos - Apr 26, 2021 at 8:30AM

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The consumer staples giant is targeting a faster growth trajectory from here on out.

PepsiCo (PEP 1.64%) is right where it wants to be. The company just affirmed its aggressive growth outlook for 2021 after logging modest growth in the fiscal first quarter. While sales gains slowed compared to last year, Pepsi is still boosting volumes in both its beverage and food divisions.

In a conference call with Wall Street analysts, CEO Ramon Laguarta and his team broke down the latest results while adding context to their fiscal year outlook. Let's look at some highlights from that presentation.

A woman drinking sparkling water from a glass.

Image source: Getty Images.

Still winning market share

"Both our global snacks and beverage businesses have performed well even as consumers gradually return to pre-pandemic activities and behaviors." -- Laguarta 

Pepsi endured a growth slowdown, as expected, but sales still grew across the portfolio. Organic sales were up in the mid-single digits in the snack and food segment, with slightly slower results in beverages. Overall, organic revenue rose 2% compared to last quarter's 6% increase.

That metric was up 10% on a two-year basis, indicating solid market share growth even as the pandemic threat fades. Pepsi added to that organic growth with recent acquisitions in the energy drink space. Snack brands like Doritos and Frito Lay performed well, and so did beverages such as Mountain Dew and Bubly.

Spending cash on the business

"We will continue to prioritize capital expenditures to meet the critical growth and investment needs of our business and prioritize returning cash to our shareholders by paying and growing our dividend." -- Laguarta

Pepsi reported a big jump in earnings, but underlying profitability was hurt by rising costs, extra spending on the business, and weather-related shipping disruptions.

The margin outlook still envisions a potential third straight year of declines while Pepsi raises its production capacity as part of its shift toward targeting higher growth. That initiative will leave much less room for stock buyback spending in 2021, and overall capital returns will fall to $6 billion from $7.5 billion last year.

A new normal

We are...assuming that certain pandemic-related behavioral shifts that have underpinned the performance of large format and e-commerce channels will sustain, such as greater online adoption and penetration, more remote work arrangements and continued strength in household penetration for large, trusted brands. -- Laguarta

Pepsi is targeting solid growth this year, and that's on top of 2020's spike and despite big swings in consumer shopping trends in 2021. Its Quaker Foods segment will take the biggest hit as consumers go back to spending less time eating meals at home. But management expects a persistent lift across its business from a new normal pattern of snacking and drinking around the house.

That means shareholders can reasonably expect even faster annual sales gains than the 5% boost the company logged before COVID-19 scrambled consumer staples demand. The company is hoping to pair that spike with steadily improving margins and aggressive cash returns. But investors will have to wait through at least another year of weak profitability before they see this full rebound.

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