Snack and beverage giant PepsiCo (PEP) will report second quarter fiscal 2018 earnings results before the opening bell Tuesday. And all eyes will be on the company’s gross margins, which has been under pressure over the past couple of quarters.
While Pepsi has beaten Wall Street’s earnings estimates in nine consecutive quarters, achieving this feat hasn’t been easy. In the first quarter, despite a 3-cent beat, the company’s bottom line was adversely affected by higher costs and a rise in interest expenses. This is because, among other initiatives, Pepsi has been working hard to improve its competitive position against rival Coca-Cola (KO) and K-Cup maker Keurig, which made a recent $21 billion acquisition of Dr Pepper Snapple Group (DPS), a move that has since added even more pressure to the beverage space.
Pepsi stock closed Friday at $109.56 and is down 8.64% year to date, compared to only a 2.7% decline for Coca-Cola. Pepsi shares have fallen about 1.5% since reporting first quarter results due to the contracting margins. Aiming to appeal to consumers who are migrating towards less sugary drinks, Pepsi has been aggressive with timely product launches and its marketing campaigns. On Tuesday Wall Street will want to see a better return on those investments.
For the three months that ended June, Wall Street expects the New York-based company to earn $1.52 per share on revenue of $16.08 billion. This compares to the year-ago quarter when earnings were $1.50 per share on revenue of $15.71 billion. For the full year, ending in December, earnings of $5.68 per share would rise 8.6% year over year, while full-year revenue of $65.21 billion would rise 2.6% year over year.
While some analysts have questioned the competitive advantages a Keurig/Dr. Pepper marriage might bring, the recently approved deal will nonetheless add even more pressure to Pepsi, and for that matter, Coke. The former has also been working to revive its popular sports drink, Gatorade. Having recently launched Gatorade Zero, a version without carbohydrates, the company, in the first quarter, said its was seeing "improved sales performance and trajectories," for the category.
On Tuesday investors will also focus on the company’s snack division, particularly the Doritos chips and Frito-Lay business and its performance in North America. While that business continues to grow (up 3% in Q1), profitability has been hurt due to higher operating cost inflation, which has impacted its margins. While the company has been able to offset those costs by lowering its advertising and marketing expenses, Pepsi risks losing ground to Coca-Cola, which has ramped up its own marketing with Diet Coke, helping it to boost volume growth in North America.
All told, while Pepsi can (and I believe will) overcome its margin challenges, that doesn’t make the stock a compelling buy today. The company must first allay investors’ fears and guide in a way to suggest confidence about its long-term growth and competitive position.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
