PepsiCo (PEP 0.80%) is scheduled to report fourth-quarter 2021 earnings on Feb. 10. The international snack and beverage giant has been thriving since the pandemic's onset as folks spend a lot more time at home since the outbreak. That's creating more opportunities for them to reach for one of PepsiCo's snacks or beverages.
However, PepsiCo is now grappling with supply-chain headwinds that have increased input costs and constrained output. When the company reports fourth-quarter earnings on Feb. 10, investors will want to see if it's winning that battle.
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PepsiCo is feeling the inflationary bite
In its most recent quarter, ended Sept. 4, PepsiCo's revenue increased by 11.6% from the same time a year earlier. That's huge. For comparison, PepsiCo's sales increased at a compound annual rate of just 2% in the past decade -- which shows the magnitude of the pandemic's tailwind. Plus, the growth was broad-based across products and geographies.
No doubt, PepsiCo has done so well since the pandemic's onset because of the stay-at-home trend. The company's snack segment operates at meaningfully higher profit margins than its beverage segment. So when people were eating at home more often, this boosted sales in its more lucrative segment.
Speaking about the company's third-quarter performance in prepared remarks, CEO Ramon Laguarta said: "We exhibited strong marketplace performance with market share improvements in key categories such as salty snacks, savory snacks, and carbonated soft drinks in North America, and sustained strong business momentum in key international markets."
Still, the quarter was not without challenges. Even though PepsiCo reported revenue growth of 11.6%, operating profit increased by just 6%. Typically, a company the size of PepsiCo demonstrates leverage in its cost structure, and operating profits grow at a faster rate than revenue. In this case, the slower operating profit growth reflects the widely reported shortages worldwide. PepsiCo was forced to pay higher prices for materials, labor, and transportation.
To offset these higher costs, PepsiCo has implemented price increases of its own and will continue to do so throughout the fourth quarter. Management noted that consumers are responding better than expected to recent price increases (not decreasing purchasing as much). It remains to be seen if they'll continue that favorable response to even higher prices.
What this could mean for PepsiCo investors
Analysts on Wall Street expect PepsiCo to report revenue of $24.23 billion and earnings per share (EPS) of $1.51. If it meets those projections, that would represent increases of 7.90% and 2.72%, respectively, from the year-ago period.
PepsiCo's stock is up 5.1% in the past three months. This has come as investors have shunned speculative growth stocks and transitioned into the more defensive categories in which PepsiCo falls. The shares are trading near to their highest price relative to free cash flow and earnings in the past decade, perhaps indicating that the benefits of the market transition may be nearing the peak.
To support the stock's further progress, PepsiCo will likely need to continue delivering notable earnings and free cash flow growth.
