Pepsi stock is taking a dip pre-market as the company just announced its quarterly result. The beverage and snacks company declared a lower than expected revenue. The main culprit behind this was its snacks segment.
The company has not missed its profit targets in over 10 years. So a beat today wasn’t enough to impress investors who noticed the underlying problem troubling the company: Sales.
Revenue rose 1.9% in the second quarter, missing the average analyst estimates of 2.9% by a big margin. Food segment volume was down 2%.
Should investors be worried?
Investors love to compare Coca Cola and Pepsi, both as beverages and as investments. While it has always been hard for Pepsi to beat Coke in terms of quality, its stock often looks more attractive to investors.
The main reason for this attraction is Pepsi’s diversification into the snacks business. Its famous products include Lay’s, Doritos, and Cheetos among many others.
So when this diversity takes a hit, the investors are shaken. This is what is happening right now. After multiple years of successful sales growth, Pepsi has just started struggling.
Is it the inflation? Or just health conscious Americans? Possibly a mixture of both.
Price hikes have become increasingly difficult for consumers to stomach, pushing volumes in the wrong direction.
Aarin Chiekrie, Equity Analyst.
Plus, the recall of Mug Root Beer and Quaker Oats during the quarter also drove consumer sentiments against the brand.
That hit to consumer sentiment will trouble Pepsi through the next quarters as well. The company will increase spending on marketing and advertising. While the brand calls it ‘surgical’ spending on promotions, it really is just the need to spend more to improve the company’s image.
The extra spending will be offset with productivity initiatives and cost-cuts.
The group will have to lean into cost-cutting and productivity initiatives in order to offset some of the impacts of lower volumes and keep profit targets on track in the short term
Aarin Chiekrie, Equity Analyst.
An industry-wide problem
Pepsi isn’t the only company struggling to keep up food segment revenues. Conagra Brands Inc. has noticed a similar trend in its sales.
Other brands like Kraft Heinz and General Mills have also highlighted the need to improve margins through productivity initiatives. Clearly, the industry is struggling with sales.
On the international front, Pepsi did a better job. Its sales went up even though Asia Pacific and Latin America grew slower than expected. 59% of Pepsi’s global revenue comes from its food segment, so the company has its task cut out for the remainder of the year.
The stock was trading down nearly 3% in pre-market. Its 1-year performance of -12.7% is nothing to write home about. For context, its rival Coca Cola’s stock is up 4% in the last year and over 6.5% YTD.
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