PepsiCo Reports Mixed Q2 Results, Plans to Focus on Incubation

Despite tepid growth numbers for the spring, PepsiCo is placing an increased emphasis on innovation and incubation, chairwoman and CEO Indra Nooyi told investors and analysts during the company’s second quarter earnings call today.

Analysts, including those from Wells Fargo Securities and Seeking Alpha, had predicted poor results from the company’s Q2 earnings report, with North American beverage sales appearing weak ahead of this morning’s release. But the actual numbers were better than expected. North American beverage revenue was down 1 percent to $5.19 billion, but the sector has been rebounding over the past several weeks, Nooyi said, in large part thanks to the core Pepsi brand and a strong response to the “Generations” marketing campaign, which features limited edition cans featuring some of the brand’s famous spokespeople from years past, such as pop stars Michael Jackson and Britney Spears.

“In the second quarter, we began to see improvement in a number of key brand health metrics that is leading to better net revenue performance as the year progresses,” Nooyi said. “So, we intend to stay the course increasing investment behind brand support in the second half of the year with the aim of driving further top line improvement.”

New innovations have also been driving the growth, Nooyi said. Sparkling water entrant Bubly, which launched in February, has outperformed internal predictions, she said. Gatorade Zero, a new zero sugar line for the sports drink, has also performed well at launch.

However, the company is looking to improve the way it handles other new innovations. Lemon Lemon, a sparkling lemonade line launched in 2017, has seen strong sales but has cannibalized PepsiCo’s core carbonated soft drinks in the DSD system, Nooyi said.

The need to incubate emerging brands has led to the creation of The Hive, an off-campus entrepreneurial group that will focus on developing new products and assessing whether they should be brought into the general PepsiCo DSD system, Nooyi said. Similar to The Coca-Cola Company’s Venturing and Emerging Brands unit (VEB), The Hive will also explore venturing brands that can be brought in. The unit, she added, is similar to a program PepsiCo has in Europe but will remain focused solely on the North American market.

“If I look back, especially the last five years of beverages, we have had some spectacular new products which for any small startup company would have been a blockbuster, but for PepsiCo — because we have put it through DSD system — unless it reaches the scale of a LIFEWTR or Bubly in the first 12 to 18 months, we can’t support it,” Nooyi said during the Q&A section of the call. “Because many times the space has to come out of the core cooler or the core isle and so we look at differential velocity and then the DSD system tends to kill it.”

Overall net revenue for the quarter finished at $16.1 billion representing 2.6 percent organic growth. Operating profit for North American beverages decreased by 16 percent due to operating cost increases, including transportation costs and the net revenue performance.

PepsiCo stock closed positively this afternoon, up 5.13 points, at $112.89.

Bonnie Herzog, managing director for equity research at Wells Fargo Securities, gave a mixed assessment of PepsiCo’s Q2 performance. She cited “solid results in emerging markets” while noting that continued volume pressures in non-alcoholic beverages, which fell around 2 percent, could be of concern in the near-term future.