PepsiCo: Focus on Innovation Continues Amid ‘Solid’ Q2 Report

PepsiCo exceeded analysts’ expectations in its second quarter earnings report, released today, delivering solid topline growth amid a product innovation wave.

Organic revenue for the entire company grew 4.5% during the quarter for a total net revenue of $16.4 billion. PepsiCo Beverages North America (PBNA) saw 2% organic net revenue growth, reporting net revenues of $5.3 billion, bolstered by a 4% increase in pricing. However, beverage volumes declined 2% in the quarter. Operating profit for PBNA was $690 million.

Wells Fargo Securities analyst Bonnie Herzog called the results “strong,” but added that “while we’re excited by today’s better-than-expected results and see some upside in the stock today, we maintain our Market Perform rating given valuation.”

Despite the results, PepsiCo stock value closed today down 0.82 points to $131.74 per share.

Speaking with investors this morning, PepsiCo CEO Ramon Laguarta said the company has invested in advanced data and analytics to enhance the company’s consumer insights and “sharpen the precision of [its] execution.” The company has also invested in growing manufacturing capacity.

Innovation has been paying dividends for the company, Laguarta said. In the past year, PepsiCo has focused on broadening its core product portfolio, introducing new flavors for the Pepsi brand and developing new functional lines for its other brands.

During the call’s Q&A portion Laguarta said the introduction of sugar free variety Gatorade Zero has allowed the sports drink line to expand its consumer base and is likely to provide sustained incremental growth for the brand. He also offered an optimistic outlook for Gatorade Bolt24, a new line extension made with watermelon water, sea salt, vitamins and antioxidants that will serve as a functional beverage for “off the field” use occasions.

“We’re seeing incrementality for the category, we’re seeing incrementality for the brand,” Laguarta said. “Gatorade Zero is already the number one ‘Zero’ sports drink in the country by quite a distance. I would say and we see every week the velocity of the brand improving.”

Laguarta also pointed to new innovations for Propel as providing a “big opportunity,” with the line showing consistent double digit growth for several years. In April, PepsiCo announced a new Vitamin Boost line extension for Propel, which contains zero sugar and added vitamins to improve functionality.

Bubly, a sparkling water line launched in February 2018, has doubled velocity over the past several months following a Super Bowl ad campaign, Laguarta said. He noted that the brand is still expanding its distribution and that the company is in conversation with retail partners to expand placements in stores. The company is currently planning innovations for Bubly, including new flavors and pack sizes, abandoning plastic bottles and adding both mini and larger sized cans.

“[Bubly is] going to be a no plastic brand and I think that is a very good positioning that we can have for this brand going forward for the modern consumer, the millennial and the younger mother that I think is adopting this brand for her kids,” he said. “So we’re feeling very good about this brand. This could be one of our next $1 billion brands.”

With innovations on Pepsi and Gatorade rolling out, Laguarta said the company now plans to invest in expanding Mountain Dew. The current strategy, he said, is to slowly transition the brand towards the energy category, placing increased emphasis on the Kickstart and Game Fuel lines and focusing new innovations on caffeinated products.

“We’re investing in the core Dew consumer, [who is] very loyal, and giving them their preferred product in non-sugar and sugar options,” he said. “[We’re] innovating in flavors in Dew and then moving Dew slowly into other spaces where we think the brand has a role to play and I think we’re able to formulate products that will be very competitive in that space as well.”