Beverage and snack giant PepsiCo (NASDAQ:PEP) issued its first-quarter 2015 earnings report today, revealing a 3% decline in revenue and essentially flat earnings. The company earned $1.2 billion on $12.2 billion in revenue, versus the prior-year quarter's $1.2 billion profit on revenue of $12.6 billion. Diluted earnings per share inched up two pennies to $0.81.
After removing the effects of an ascendant U.S. dollar versus major world currencies, PepsiCo showed organic revenue growth of 4.4%. and operating profit of 8%. The company encapsulated these and other currency-adjusted figures in its quarterly earnings infographic, which is consistently one of the most colorful on Wall Street:
This quarter's Bam! Pow! cartoon aesthetic, aside from taking investors back to their comic-reading days, is meant to visually enforce the idea that if one strips away the pesky issue of dollar strength, PepsiCo's results are surging.
The problem with this thesis is that PepsiCo also warned this morning that adverse currency effects would negatively effect core earnings per share by 11% for the full year, in contrast to a previously announced 7%.
This warning suggests Pepsi sees weakness in the euro, as well as in Latin American and Asian currencies, persisting throughout the full year, and that the company will continue to struggle to contain the effects on its global sales and profits.
How much attention should investors give swings in foreign exchange? On one hand, removing currency effects from reporting can help shareholders more clearly understand "constant currency" -- i.e., apples-to-apples results. So when Pepsi and other large companies report "adjusted" numbers, it helps investors more clearly see the core changes in a corporation's business.
On the other hand, a U.S.-based multinational ultimately retains earnings in U.S. dollars. PepsiCo will earn less than previously projected this year because the foreign currencies with which customers buy its snacks and drinks are worth less against the dollar than in the previous year. Thus, the real amount of earnings in Pepsi's coffers to distribute to shareholders in the form of dividends, or reinvest in its own stock through share repurchases, will decrease.
So a prolonged rise in the dollar will have real and negative effects on PepsiCo's bottom line, and shareholders shouldn't take the trend lightly. In the company's press release today, CEO Indra Nooyi outlined PepsiCo's line of attack as follows: "We have and will continue to take actions to manage through the current volatile macroeconomic environment by taking responsible pricing actions, tightly controlling costs, and optimizing our global sourcing to minimize and mitigate the impacts of the current foreign exchange challenges."
To translate, the company will try where possible to "take pricing," that is, to raise prices in locations where strong demand allows it. Pepsi also will continue with its productivity initiatives: the company affirmed that it is on track to deliver $1 billion in productivity savings this year.
Finally, where feasible in each geographic region, management will procure the inputs of production locally. "Optimizing global sourcing" can be thought of as purchasing raw materials closer to Pepsi's manufacturing and distribution facilities on each continent. In periods of U.S. dollar strength, multinationals seek to minimize the raw materials exported out of the U.S., as it's cheaper to buy materials closer to production facilities in local currencies.
Other highlights of Q1 earnings
Segment performance largely followed trends established over the last few quarters. Frito-Lay North America continued to drive value for the company, increasing revenue by 3% and operating profit by 7%. PepsiCo AMEA (Asia, Middle East, and Africa) also posted attractive results, expanding its top line by 2.5% and operating profit by 25%.
Yet PepsiCo Europe performed dismally, with revenue skidding 25%, and operating profit shrinking by 34%. At $1.5 billion in sales, PepsiCo Europe is the company's fourth-largest segment (out of a total of six), yet it's still big enough to impact companywide earnings.
While PepsiCo cited the euro and Russian ruble as partly responsible for the performance lag, the magnitude of these declines is surprising. Shareholders can expect management to pay special attention to this segment for the rest of the year.
Finally, PepsiCo said shareholders can expect to see higher interest expenses on future financial statements as the company takes on increasing debt. While recent financing appears to be a reshuffling of short-term obligations, Pepsi is committed to its plan to repurchase between $4.5 billion and $5 billion of its shares this year, in addition to issuing roughly $4 billion in dividends. Should earnings continue to face foreign exchange pressure, Pepsi won't hesitate to take on a bit more leverage to keep its shareholders happy.