Solid on revenues but sluggish in sales, PepsiCo’s fourth quarter and full-year results offered mixed fortunes for the food and beverage giant.
The earnings report, shared with investors and media earlier today, showed the Purchase, N.Y.-based company matching analysts’ estimates in the fourth quarter, with net revenue holding flat at $19.5 billion. Organic revenue growth for the year was 2.3 percent, while operating income in the quarter rose 9 percent to $2.6 billion.
“We are pleased with our performance for the fourth quarter and full year 2017,” PepsiCo chairwoman and CEO Indra Nooyi said in a statement. “We met or exceeded most of the financial goals we set out at the beginning of the year. We delivered these results in the midst of a dynamic retail environment and rapidly shifting consumer landscape.”
In a call with shareholders and members of the media, Nooyi cited Frito-Lay North America as a growth driver for the company, as strong performance from its snack products led to organic revenue growth of 5 percent for the brand.
In North America, beverages posted sequential improvement in organic revenue. However, Nooyi acknowledged that “2017 was a year that we would have liked to have had better performance,” following “very good years” in 2015 and 2016. She said top line performance “still has tremendous room to improve, and we are taking the right steps to realize those opportunities.”
“We remain committed to our strategy to compete on the basis of brand building, innovation and marketplace execution across our portfolio of brands as the best way to create shareholder value over the long term,” she said.
Pepsi CFO and executive VP Hugh Johnston said he expects a 9 percent increase in core earnings compared to 2017.
As part of the tax reform enacted by Congress late last year, Pepsi was hit with a $2.5 billion provisional net tax expense, resulting in a $710 million loss in the fourth quarter.
Pepsi also announced forthcoming layoffs for some corporate employees during the call, which will be equivalent to less than 1 percent of the company’s 110,000 employees. Full-time, front-line U.S. based associates who make or deliver Pepsi snack and drink products will receive bonuses of up to $1,000.
Pepsi’s recent innovations across categories — from new sparkling water line Bubly to the low-calorie line extension Mountain Dew Ice, which received a splashy Super Bowl ad starring Morgan Freeman — are part of the company’s strategy to recharge beverage sales. “I’ll be honest, I believe we were late to flavored sparkling water, I wish we’d launched Bubly a couple of years ago,” Nooyi said during the Q&A session. In other water news, the electrolyte enhanced water brand LIFE WTR, which Pepsi backed with a major marketing spend upon its launch last year, will be rolled out globally in 2018.
Saying “I wish we had more of them,” Nooyi also offered an update on Pepsi’s two joint ventures — with Starbucks for RTD coffee and Unilever for Lipton and Brisk tea. She acknowledged that Coca-Cola’s RTD partnership with Dunkin’ Donuts, launched in late 2016, has resulted in some share erosion for Starbucks, but that “ultimately, the business has to be won on velocity of the product, and we’re doing just fine.”
Pepsi’s ready-to-drink tea brands, which include Pure Leaf, Brisk and Lipton, have grown in the U.S. and globally, with some outperforming others. New flavors, innovations like the premium Tea House Collection, and a “re-advertising” of the core Lipton products will give Pepsi’s RTD tea business a “much-needed boost,” Nooyi said.
While it remains the dominant player in the sports drink category, Gatorade has shown some signs of slowing momentum. In a survey of convenience store retailers published last week by Wells Fargo senior beverage analyst Bonnie Herzog, responses noted that consumers desire for lower sugar, clean-label products, along with sustained momentum for rival BodyArmor, is hurting Gatorade. Johnston said Pepsi was preparing “a full lineup of innovation” for the brand this year, which could go beyond new flavors. Nooyi added that Gatorade trends “are improving,” and the feeling around the business is positive.
In terms of distribution, Nooyi indicated that Pepsi has no plans to refranchise its U.S. bottlers, though it recently did so in select international markets including Thailand and India. On a related note, she said she was “still searching” for the strategic logic behind the move, pointing out 80 percent of Dr Pepper Snapple (DPS) distribution goes through either Coca-Cola or Pepsi’s own networks.
In her Wells Fargo equity research newsletter, Herzog said of Pepsi’s earnings report: “We are broadly impressed with PEP’s ability to deliver bottom line results despite the dynamic retail environment and their continued underperformance in the beverage performance.”
PEP shares on the New York Stock Exchange climbed slightly this afternoon, up just under 2 percent.