PepsiCo raised its 2022 full-year organic revenue guidance to +12% in its Q3 earnings report this week, citing a strong quarterly performance bolstered by North American market share increases in snacks and sports drinks.
The New York-based conglomerate surpassed analyst expectations in its quarterly report, announcing Q3 net revenue growth of 8.8% to $21.97 billion. Organic revenue growth increased 16% in the quarter with core EPS of $1.97, up 14%. Earnings per share was up 22% to $1.95 in Q3 and rose 33% to $6.04 year-to-date.
Core gross profit increased 8% and core gross margin declined 20 basis points as a result of inflationary pressures. Core operating profit was up 11% and core operating margin expanded by 30 basis points.
In addition to raising full-year organic revenue projections (up from 10% in Q2), the company also increased its core constant currency earnings per share projections from 8% to 10%.
“Our strong results demonstrate that the investments we have made towards becoming an even Faster, even Stronger, and even Better company with [data platform] pep+ at the center of everything we do…” said PepsiCo chairman and CEO Ramon Laguarta in a statement. “We are encouraged by the progress we are making on our strategic agenda, and remain committed to investing in our people, brands, supply chain, and go-to-market systems and winning in the marketplace.”
Organic revenue for PepsiCo Beverages North America (PBNA) was up 13% in Q3, while Frito-Lay North America was up 20% and Quaker Foods North America increased 16%. The international business reported its sixth consecutive quarter of double-digit organic revenue growth, up 16%.
The company attributed the positive outlook to improved operational efficiencies, including a “strong holistic cost management program” that leans heavily on analytics to optimize delivery routes and improve in-store execution “with more precise assortments and offerings”, as well as automating supply chain management.
On the PBNA business, the company cited strong double-digit net revenue growth from the Gatorade, Pepsi and Rockstar brands while MTN Dew and Aquafina each reported high single-digit net revenue increases. PepsiCo is also making more moves in the low-alcohol category via a new agreement to distribute Lipton-branded hard iced tea, beginning in 2023, and the expansion of its Hard MTN Dew line to nine U.S. states.
As well, the launch of energy/sports drink hybrid line Gatorade Fast Twitch is expected to boost the Gatorade brand, which has seen increased competition from Coca-Cola’s BodyArmor.
“We are very encouraged with Gatorade’s progress and recent share improvement as we have innovated and extended our presence in the sports nutrition category with Gatorade Zero, Propel, Gatorade and GFit – a brand portfolio that fuels performance and athletic wellness,” the company said in a statement.
Speaking with investors and analysts on a call Wednesday, Laguarta said the innovation drive for Gatorade has helped to drive incremental sales. With Fast Twitch, he noted more athletes are consuming caffeine, creating an opportunity for a hydrating energy option. The brand is currently being sold to the NFL and will have a full national retail rollout in 2023.
“We think there is a role for Gatorade to play in [the energy] space, providing some additional stimulant to the performance, but also providing the hydration in one single consumption,” Laguarta said. “We’ve been told by the trainers and by other people that work with the athletes to go and help them. So this drink has been developed with the athletes, developed with the trainers with that occasion in mind.”
Meanwhile, the Frito-Lay North America business benefited from “its diversified portfolio, marketplace execution, and strong net revenue management capabilities.” Brands including Doritos, Cheetos, Lay’s, Ruffles, Tostitos, Fritos, PopCorners, Smartfood, bare and SunChips all saw double-digit net revenue improvements.
On the call, Laguarta noted that PepsiCo’s food sales are outpacing the industry and that the company anticipates it will continue to increase its market share in the coming months. He noted that PepsiCo has seen market share gains in about 70%-75% of its markets and is experiencing about 70% gains in international beverage markets.
“We have invested a lot for the last couple of years,” he said. “Our innovation is working. Our brand building is working. Our commercial execution is working and we gained meaningful share in the quarter, which makes us very happy, obviously, given the efforts the team has put in that brand. We’re gaining share in teas. We’re getting share in coffees. So, [there are] multiple categories where the business is performing very well.”
The company is also benefiting from its recently signed distribution deal with fitness energy drink rband CELSIUS. Laguarta said that about 80% of Celsius’ distribution has now been integrated into the PepsiCo system.
“In terms of the structure [of the CELSIUS deal], frankly, we looked at it and said, look, we’d like to do a distribution agreement, but we knew we were going to create some additional value for the company and we felt like we should participate in that value,” he said. “And we set up a structure that enabled us to do that. It doesn’t take us any further than what you see right now and it puts us in a position where it’s preferred. So, we’ll either get paid based on the preferred or down the road at the relatively small position we have could convert at some point.”
During Q3, PepsiCo also furthered its long term sustainability mission by issuing a new $1.25 billion Green Bond with a ten-year maturity period that will allow the company to further invest in its environmental sustainability initiatives, primarily focused on agriculture and “positive value chain” opportunities. The company has partnered with Archer Daniels Midland to expand its regenerative agriculture capabilities across its North American supply chain on up to two million acres of new farmland.
PepsiCo Beverages North America also opened a new manufacturing facility in Denver which will “aim to achieve 100 percent renewable electricity, best-in-class water efficiency, and reduced virgin plastics use.”