PepsiCo (PEP) is trading higher today following its Q1 earnings report this morning. Core EPS (non-GAAP) rose 1% yr/yr to $0.97 while revenue rose 2.6% yr/yr to $12.88 bln. Both results were modestly better than market expectations, more so on the EPS line. Organic revenue grew 5.2% yr/yr (excluding foreign exchange impact). In terms of FY19 core EPS guidance, PEP reaffirmed prior guidance of $5.50, a 3% decline from $5.66 in 2018.
Overall, PEP says that it was pleased with its Q1 results. PEP did concede that the strong dollar hurt results, but its underlying organic revenue growth accelerated to more than 5% in the quarter. Management noted that Frito-Lay North America and each of its international divisions recorded "particularly strong operating performance" and that the PepsiCo Beverages North America division delivered sequential quarterly net revenue acceleration.
A change at the top occurred at PEP in October 2018, when Indra Nooyi stepped down as CEO and Pepsi's global operations chief, Ramon Laguarta, took over the helm as CEO. One of the key goals for the new CEO has been to accelerate the company's top-line growth in a sustainable way and to compete more effectively. PEP, per its current mission statement and priorities, wants to "become faster by being more consumer-centric," which means "broadening [its] portfolio and packaging formats to win locally." Beyond its consumer strategy, PEP has been focused on advancing farming practices to optimize crop yields in pursuit of sustainability. It has also been seeking to increase the appeal of its products by reducing added sugars, sodium, and saturated fats and adding more positive ingredients.
Pepsi closed on a major acquisition in December 2018 when it acquired SodaStream, the world's largest manufacturer of home beverage carbonation systems. After initially focusing on carbonated sodas, SodaStream a few years ago repositioned itself as a sparkling water brand. Its re-named Sparkling Water Makers enable users to easily transform tap water into sparkling (carbonated) water and flavored sparkling water.
Why did PEP buy SodaStream? The main reason is that carbonated soda sales have been slumping the past few years. Sparkling water has quickly become popular with consumers as a healthier alternative to carbonated sodas, which are generally higher in calories and contain more artificial flavors/colors as well as caffeine. Sparkling water brands like LaCroix and Polar Water have taken off with consumers. This deal, in addition to bolstering PEP's position in the sparkling water space, also gave PEP a beachhead for at-home water prep systems.
Q1 was the first full quarter with SodaStream in the fold. While not providing specific performance results, PEP did say that it sees SodaStream as a long-term strategic bet for a few reasons. One is that PEP thinks consumers will be looking for customization of beverages in the home. SodaStream also supports sustainability goals, as it provides consumers beverages without plastic bottles. PEP only provided general comments, saying that SodaStream's performance was good and that it has accelerated versus the past.
From a broader perspective, PEP has been hurt by a shift in consumer preference away from carbonated soda and toward non-carbonated soda drinks. The SodaStream acquisition was a way to help PEP align better with consumers' shifting tastes. PEP has also been trying to innovate more with non-carbonated beverages and has had some good success. Also, PEP has a lot of exposure in terms of non-carbonated sodas, including through its Gatorade unit, which continues to perform well, and its Tropicana orange juice brand, which is a major revenue driver. In addition, its snack business has been doing quite well.
Looking ahead, investors are still getting used to how the new CEO will run the company. Some are hoping that he will push to split the company in two. Investors have been asking for years that PEP separate its beverage business from its snack business in order to create two separate companies that could be valued by the market independently. The prior CEO decided not to go that route, but we will see if the new CEO decides to pursue that at some point.