PepsiCo (PEP 0.27%) reported earnings for the second quarter of 2022 before the markets opened on Tuesday, July 12. The international snack and beverage company reported better-than-expected revenue and raised the target for the rest of the year.
The company has done an excellent job managing the impacts of inflation by skillfully employing a mix of price increases, cost management, and packing changes. Impressively, consumer purchases of its products have not decreased despite the price hikes. Let's dive deeper into its quarterly figures.
NASDAQ: PEP
Key Data Points
PepsiCo demonstrates pricing power
In its fiscal second quarter, which ended on June 11, PepsiCo generated revenue of $20.2 billion. That was an increase from the $19.2 billion it reported in the same quarter the previous year and better than the $19.5 billion analysts on Wall Street were expecting. Driving the boost was a healthy dose of price increases across its product portfolio, including snacks and beverages. Indeed, the company's total net price increases were 12% in the quarter that ended in June.
Surprisingly, consumers did not decrease the quantities purchased despite the higher prices. Instead, the total volume of PepsiCo's products sold increased by 1% in the quarter. In the conference call that followed the earnings release, management noted that consumer elasticity is lower than historical averages for the company. Note that elasticity measures the decrease in units sold in response to increasing prices.
PEP Revenue (Annual) data by YCharts.
The excellent performance in the quarter gave management the confidence to raise the revenue growth target for the year to 10%. That was up by 200 basis points from the previous forecast for revenue to grow at 8% for the year. To put that figure into context, consider that Pepsico has grown revenue at a compounded annual rate of 1.8% for the last decade. That highlights the magnitude of its outperformance during the pandemic, where revenue growth is multiples higher than its historical averages.
Interestingly, management left the profit forecast for the year unchanged. PepsiCo still expects core earnings per share to rise by 8% in fiscal 2022. Rising costs due to inflationary pressure are expected to absorb most benefits from the higher revenue growth.
What this could mean for PepsiCo investors
PepsiCo's results in the second quarter are evidence of the company's pricing power. It raised prices by double-digits, and unit sales managed an increase. That's an excellent sign for shareholders as inflation raises business operating costs. The Bureau of Labor Statistics' latest report for the consumer price index in the U.S. showed a 9.1% increase in June from the same month in the prior year.
U.S. Consumer Price Index YoY data by YCharts.
If these pressures persist, shareholders can feel good about PepsiCo's ability to raise prices to protect its profits.
