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PepsiCo (PEP) is modestly higher after a mixed Q3 report this morning. Core EPS of $2.34 came in above expectations, while revenue increased 5.6% yr/yr to $25.27 bln, also above expectations. While North America showed some sequential improvement, underlying trends remain soft. Additionally, PEP lowered FY26 core EPS growth guidance to 2.5-3.5% from the low end of its prior 5-7% outlook and narrowed organic revenue growth guidance to approximately 3% from 2-4%.

• Organic revenue growth accelerated to 3.1% in Q3 from 2.4% in Q2, its strongest pace since Q4 2023. Global beverage volume growth improved to 3% in Q3 from 2% in Q2, while convenient foods volume growth slowed to 1% from 3% over the same period.
• North American foods showed some improvement, with organic revenue roughly flat compared to a 2% decline in Q2. U.S. savory snack volumes increased, with the business gaining market share, with Doritos, Cheetos, and Ruffles performing well. However, overall segment volume remained flat as other foods and Canada continued to weigh on results.
• North American beverages remained soft, although volume declines moderated to 2% from 4% in Q2. Reported revenue grew 5%, primarily reflecting acquisitions, while organic revenue declined slightly. Gatorade, Propel, and zero-sugar offerings performed well, but carbonated soft drinks continued to underperform the broader category.
• International remained a bright spot, with organic revenue growth accelerating to 8%, marking 22 consecutive quarters of at least mid-single-digit growth. EMEA and Asia Pacific Foods each delivered 9% organic growth, while Latin America Foods grew 6%. Asia Pacific food volumes jumped 11%, while international core operating margin expanded 105 bps, supported by revenue growth and productivity savings.
• Core operating profit increased 3% yr/yr, but core operating margin contracted 35 bps yr/yr to 16.9%. North American foods faced the most pressure, with core operating profit declining 12% and core margin contracting 280 bps, reflecting affordability investments, higher marketing spending, and the comparison against a prior-year asset sale gain.
• The reduced FY26 earnings outlook reflects a more prolonged recovery in North America. Management acknowledged that improving growth and margins is taking longer than planned, with continued margin pressure expected in Q4. PEP is also pursuing additional structural cost reductions to help support investments in innovation and marketing.

Briefing.com Analyst Insight

Overall, while PEP is trading higher following its results, Q3 still paints a mixed picture of its North American turnaround. The modest move higher may reflect some relief around sequential improvement, particularly with shares entering the report near 52-week lows. However, profitability remains a challenge, and the reduced FY26 earnings outlook highlights the work still ahead. International continues to perform well, but PepsiCo has yet to demonstrate that improving North American volumes can translate into stronger earnings growth.