PepsiCo Renews Push for Cost Cuts as Currency Erodes Sales

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PepsiCo Beats Estimates on Snack Sales, Cost Cuts

PepsiCo Inc., the world’s largest snack maker and second-largest beverage company, vowed to keep a tight lid on expenses this year as the strong dollar takes a bigger bite out of overseas sales than expected.

The company said on Thursday that it remains on track to achieve $1 billion in cost savings this year and plans to return $8.5 billion to $9 billion to shareholders. Currency effects have made it harder to meet those goals, increasing the urgency to trim expenses and maintain the prices of its snacks and beverages. Exchange rates are expected to reduce earnings by 11 percentage points in 2015, up from a previous projection of 7 percent, PepsiCo said.

“This is the new world,” Hugh Johnston, chief financial officer of the Purchase, New York-based company, said in an interview. “The world is just a more volatile place than it was as recently as five or six years ago. The volatility is a constant for us.”

That outlook raised concern for investors on Thursday, even after PepsiCo reported better-than-expected profit. The stock declined 1.6 percent to $95.73 at the close in New York. PepsiCo shares have gained 1.2 percent this year, compared with a 2.6 percent advance for the Standard & Poor’s 500 Index.

Breakup Campaign

While first-quarter earnings beat estimates, the currency impact turned what would have been a 4.4 percent sales gain into a 3.2 percent decline. That’s put more pressure on Chief Executive Officer Indra Nooyi to prove she can run the business efficiently, especially after the CEO warded off a campaign last year to break up PepsiCo’s snack and beverage businesses.

PepsiCo’s Frito Lay North America unit has already revamped its package sizes to earn more revenue per ounce and adjusted marketing to focus on the most profitable configurations. The division also is squeezing more out of its flagship brands, such as Doritos, by rolling out new flavors. That includes Doritos Jacked 3D Jalapeno Pepper and Cheetos Sweetos, a sweet version of the cheese powder-covered snack.

“The stuff we can manage, we are managing well,” Johnston said.

Profit margins widened last quarter, helping increase earnings to 83 cents a share, excluding some items. The average of analysts’ estimates compiled by Bloomberg was 79 cents.

“We have generally been encouraged by improvements in PepsiCo’s beverage business and ongoing solid results in snacks,” Bonnie Herzog, an analyst for Wells Fargo & Co., said in a note before the results were released.

Activist Fight

Activist investor Nelson Peltz, the head of Trian Fund Management, backed away in January from his threat of a proxy fight after PepsiCo elected Bill Johnson, a longtime food company executive and adviser to Trian, to its board. Peltz had been pushing to break up PepsiCo.

The company’s snacks and drinks pairing helped the company win a multiyear marketing partnership with the National Basketball Association, announced last week. Mountain Dew will serve as the lead brand in North America, and the deal includes Aquafina, Brisk, Doritos and Ruffles brands. Coca-Cola Co., the world’s top beverage seller, had been the league’s sponsor since 1986.

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