PepsiCo (PEP +1.29%) reported fourth-quarter and fiscal year results on Thursday, Feb. 10. The global beverage and snack company delivered robust sales growth, but widespread inflation affected profits.
The coronavirus pandemic is making it challenging for companies like PepsiCo to operate. An infection at one of its facilities could reduce output, decreasing sales and profits. Meanwhile, the same is true for PepsiCo's suppliers, raising the costs to secure the materials it needs. Let's look closer at PepsiCo's Q4 results.
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Consumer demand for PepsiCo products is robust
Overall, PepsiCo reported revenue growth of 12.4% in its fourth quarter ended Dec. 25. That's a remarkable rate of growth for a company that has grown revenue at a compound annual rate of just 2% in the last decade. Despite economies reopening, people are still spending more time at home than before the outbreak, leading to extra occasions to reach for a snack or beverage. That trend may not be good for waistlines, but it has undoubtedly been good for PepsiCo's bottom line.
Management expects some of this momentum to slow down in 2022 and is forecasting revenue growth of 6%. Still, that growth rate is triple its typical rate from the previous decade but less than half the 12.9% of 2021. PepsiCo attributes the rising revenue growth to more than just stay-at-home trends. Here's what it had to say on the matter in prepared remarks that came with its earnings release: "We continued to win in the marketplace as we held or gained share across many of our key markets, including the U.S., Mexico, Brazil, China, Saudi Arabia, and Poland."
Indeed, out of PepsiCo's 12% revenue growth in Q4, 5% of it was driven by increased consumption -- in other words, people eating and drinking more of its products. Higher prices drove the additional 7%. PepsiCo, like many other businesses, is getting hit with higher costs. Its strategy to mitigate those costs is to pass them along to consumers. In Q4, folks paid on average 7% more for PepsiCo snacks and beverages, and according to CFO Hugh Johnston, it looks like more price increases are on the way for 2022.
Inflation is taking a bite out of PepsiCo's profits
PepsiCo could use the increases. Despite revenue increasing by 12.4% in Q4, operating income decreased by 9.3%. The most significant cause for the decrease in the operating profit margin was rising commodity costs. However, PepsiCo did experience meaningful increases in transportation and labor costs. Management expects these trends to persist well into 2022. The good news for shareholders is that PepsiCo thinks it can increase earnings per share by 8% regardless of the rising costs. Undoubtedly this confidence is a result of robust consumer demand and their willingness to pay higher prices for PepsiCo products.
