Pepsi Reported Rising Profits But Demand Continues To Shrink At Its Home Market

Before the markets opened on Thursday. PepsiCo Inc PEP issued its second quarter financials. While earnings surpassed Wall Street estimates, revenue came short as its three North American business units reported a declining volume. In addition, Pepsi was more cautious with its full-year sales outlook. As a result, its shares were down 1.7% during premarket trading.

One of its rivals one the global snacks and beverages front, Mondelez International MDLZ is scheduled to announce its fiscal second quarter earnings on Thursday, July 25th. Over the last four quarters, Mondelez has consecutively surpassed earnings estimates. But Mondelez, known as the Oreo and Cadbury maker, was also fined $366 million a month ago for rigging European markets. More precisely, the EU regulators found that since 2016, Mondelez has been hindering the trade of chocolate, cookies and coffee between European Union countries in order maintain high prices of its products. Mondelez has been deliberately limiting cross-border sales within the EU, abusing its dominant position. Responding to the commission who found its illegal practices prevented retailers from being able to freely source products in the EU member states with lower prices, Mondelez spokesperson stated that the penalty related to isolated incidents which were remedied before the commission started the investigation.

Another industry peer, Constellation Brands Inc STZ reported its May quarter financials.  Constellation Brands continued to beat profit estimates despite delivering a mixed report. Unlike PepsiCo, Constellation Brands reported beer that had its fourteenth consecutive quarter of growth with demand rising 8.3% due to wider consumption. However, Constellation Brands is also struggling with a weakness on one of its fronts, namely wine and spirits whose sales contracted by 5.1% YoY. Fortunately for Constellation, the sluggish demand from wines and spirits was compensated by consumers switching to beer. The beer business made more than 80% of the latest quarter’s revenue that Constellation Brands reported.

PepsiCo’s Second Quarter Highlights

For the quarter ended on June 15th, PepsiCo reported net sales rose almost 1% to $22.5 billion, which was short of LSEG’s estimate of $22.57 billion. Fueled by international operations, organic revenue that excludes acquisitions, divestitures and currency changes, actually grew 1.9%.

But net income attributable to the company amounted to $3.08 billion or $2.23 per share, rising from last year’s comparable quarter when PepsiCo earned $2.75 billion, or $1.99 per share. When adjusted, earnings per share amounted to $2.28, surpassing LSEG’s estimate of $2.16.

Pepsi got hurt by declining demand at its home market.

In North America, financials were hurt by safety product recalls and shrinking product demand as years of price increases led consumers to buy fewer of PepsiCo’s products and switch to cheaper alternatives. Frito-Lay North America, the company’s second largest business after the beverages unit, reported a volume decrease of 4%, while the beverage unit reported a decrease of 3%. Quaker Foods North America continues to deal with food safety recalls for potential salmonella contamination that was issued in December and January, with its volume shrinking by 17%. 

A More Cautious Outlook 

While PepsiCo previously guided for organic revenue growth of at least 4%, it now expects approximately 4%. But it reiterated its core constant currency earnings growth outlook of at least 8%.

On a brighter note, international demand remained strong despite the price increases. But in the U.S., its largest market, PepsiCo is facing increased competition from private-label brands. 

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