Costs Keep Rising, Recovery Lags: PepsiCo, Inc. (PEP.US) Lowers Guidance as North American Business Comes Under Pressure

PepsiCo, Inc. (PEP.US) lowered its earnings guidance, as the snack and beverage giant's recovery in the North American market is taking longer than expected. The earnings report showed revenue of $25.27 billion, up 5.6% year-over-year, beating expectations by $310 million; adjusted earnings per share came in at $2.34, beating expectations by $0.04. PepsiCo, Inc.'s organic sales grew 3.1% this quarter, above the consensus estimate of 2.9%. The organic sales growth was mainly driven by a 9% increase in the Europe, Middle East and Africa region, while PepsiCo, Inc.'s Frito-Lay North America sales were flat, as the recovery momentum in the company's home market weakened. The cost pressures facing the company are particularly pronounced in the North American market, eroding profit margins. PepsiCo, Inc. is striving to revive sales of its salty snacks while grappling with the dual challenges of rising costs and consumers tightening their spending amid economic pressure. In February, the company lowered prices on medium-sized supermarket packs of some of its flagship brands. However, the company will raise some prices in the coming months, suggesting that the earlier price cuts failed to effectively boost sales growth. In the third quarter, PepsiCo, Inc.'s organic revenue for both food and beverages in the North American market declined slightly. Nevertheless, strong international sales helped the company's quarterly earnings per share beat analyst expectations. CEO Ramon Laguarta said PepsiCo, Inc. will look for areas to cut costs, and described the underperforming North American business as having "considerable room for improvement." He said the company will continue to launch more products containing protein and fiber, as well as products with simpler ingredients and alternative oils such as avocado oil. Many large food companies are currently struggling with how to win back consumers, who are shifting their spending away from packaged foods toward less processed options. Laguarta also said PepsiCo, Inc. needs to "revitalize its performance" in the carbonated soft drink business, where zero-sugar and flavored products are currently outperforming full-sugar products. PepsiCo, Inc.'s potato chip pricing issue came into focus earlier this year. Due to excessive pricing, with some products selling for more than $7 per bag, the company lost shelf space in grocery stores. The company subsequently lowered prices, but CFO Steve Schmitt said the price cuts eroded profit margins. Guidance Looking ahead, PepsiCo, Inc. expects full-year organic revenue growth of 3% and core constant-currency earnings per share growth of 2.5% to 3.5%. Total cash returns to shareholders are expected to be approximately $8.9 billion, including $7.9 billion in dividends and $1 billion in share buybacks. The parent company of Doritos, Lay's and Gatorade now expects core constant-currency earnings per share to grow 1% to 2% for the fiscal year, compared with its previous forecast at the low end of a 4% to 6% range.