PepsiCo is set to release its earnings report on Friday, giving insight into how consumers have responded to the consistently rising prices at grocery stores. Like other snack and beverage companies, PepsiCo has had to carefully navigate the challenges of increasing prices in an inflationary environment while retaining its customer base. PepsiCo’s popular brands, which include Lay’s, Doritos, and Pepsi, are at stake.
In the three months ending in September, PepsiCo’s prices were 11% higher than the same quarter last year. This marked the seventh consecutive quarter in which the company raised prices by at least 10% on a year-over-year basis. In comparison, consumer prices for all food at home increased by an average of 3% during the same period, as reported by the Bureau of Labor Statistics.
Investors are eager to see the impact of these price increases on PepsiCo’s performance during the last three months of 2023. The company’s earnings report is scheduled to be released before the market opens on Friday.
According to analysts polled by FactSet, PepsiCo is expected to report net sales of $28.4 billion for the fourth quarter, a 1.4% increase from the previous year. Adjusted earnings are projected to reach $1.72 per share, indicating a 3% growth compared to the same quarter last year.
Despite strong headline sales numbers in 2023, PepsiCo’s stock has experienced a decline of 11% since its peak in May. However, there has been a recent rebound, with a 2.4% gain so far in 2024.
Examining the first three quarters of 2023, PepsiCo achieved a notable 12% organic sales growth across all seven segments compared to the previous year. However, a closer analysis reveals a decline in sales volume, with convenient food experiencing a 2% drop, and the North American beverage segment witnessing a 4.5% decline in the first nine months of 2023. European consumers also purchased approximately 3% less during this period.
Overall, PepsiCo’s earnings report will provide valuable insights into how the company has managed the challenge of raising prices while maintaining customer loyalty.
Healthier Eating Trends and Pepsi’s Strategy
Investors are keeping a close eye on the potential impact of weight-loss drugs like Ozempic on consumers’ spending habits. The concern is that these drugs could lead to reduced sales of packaged foods and snacks, which would affect food companies’ bottom line. However, analysts on Wall Street believe that the damage to food sales would be minimal.
Regardless, food companies like Pepsi are already preparing for a future where people prioritize healthier eating habits. Pepsi has made strategic investments in various areas to align with these changing consumer preferences. They have focused on introducing smaller-portion packages, zero-sugar beverages, and convenient foods with lower sodium and saturated fat content.
Pepsi’s recent acquisitions further emphasize their commitment to healthier options. In 2020, they purchased Rockstar Energy Beverages, followed by CytoSport in 2019, a company known for its protein shakes and bars. In 2018, Pepsi acquired Bare Foods, a leading dried-fruit brand.
Looking ahead, Pepsi has set ambitious targets for organic revenue and earnings-per-share growth. For the full year of 2023, they expect to deliver 10% organic revenue growth and a 13% increase in earnings-per-share, excluding any foreign exchange impact.
In 2024, management projects that the company will achieve the upper end of their long-term targets of 4% to 6% annual organic revenue growth and high-single-digit percentage EPS growth. This moderate growth rate reflects an anticipated slowdown in inflation compared to the expected growth in 2023.
Moreover, PepsiCo continues to be an attractive dividend stock as evidenced by its 51st consecutive annual dividend increase in 2023. Just this week, the company declared a dividend of $1.265 per share for the first quarter of 2024, marking a 10% increase from the previous year.
While the current dividend yield of 3% may not be particularly appealing when compared to the 10-year Treasury yield trading above 4%, it’s important to consider the potential impact of the Federal Reserve’s target rate cuts and falling Treasury yields. In such a scenario, Pepsi stock could be an attractive option for stable dividend returns.
