PepsiCo beats profit estimates as advertising push pays off

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PepsiCo Inc beat third-quarter profit estimates and forecast upbeat revenue growth for 2019 on Thursday, as aggressive advertising and a focus on healthier products spurred demand for its beverages and snacks in North America.

Shares rose 2.2 per cent to $136.83 in premarket trading, as the company said it expects to meet or exceed its fiscal 2019 organic revenue growth target of 4 per cent.

Since taking the helm last October, chief executive officer Ramon Laguarta has carved out a multi-billion dollar strategy that includes partnering with celebrities such as Chrissy Teigen and ramping up manufacturing capacity for smaller cans to boost demand for out-of-favor sugary sodas.

The company has splurged on new ads for its trademark Pepsi colas, as well as Mountain Dew and Gatorade beverages, rounding off with a campaign centring around the National Football League’s 100th anniversary.

Advertising and marketing expenditure has increased 12 per cent so far this year, the company said.

Gatorade sales have benefited from new low sugar and organic options, and the company said a sugarless version of the sports drink surpassed half a billion dollars in retail sales since its launch in May last year.

Overall beverage sales in North America rose 3.4 per cent in the third quarter to $5.64 billion, also supported by new flavours of its bubly sparkling water brand.

PepsiCo chief financial officer Hugh Johnston told Reuters that he expects bubly to become its next billion-dollar brand, with sales rising “dramatically” after a Super Bowl ad earlier this year.

The company’s major snack brands, Doritos and Cheetos, also got a boost from the marketing push, even as calorie-counting Americans increasingly shift toward healthier options.

On-the-go lifestyles are helping snack sales, Johnston said.

“With busier lifestyles (there) comes a desire to eat more conveniently, which is a strong tailwind for our business.”

Net revenue rose 4.3 per cent to $17.19 billion in the three months ended Sept. 7, beating analysts’ estimates of $16.93 billion, according to IBES data from Refinitiv.

However, the higher investments have been a drag on profit.

The company left its full-year core earnings per share forecast unchanged, which Wells Fargo analyst Bonnie Herzog said was a sign that the cost of achieving top line growth was rising.

PepsiCo’s attributable net income fell to $2.10 billion, or $1.49 per share in the quarter, from $2.50 billion, or $1.75 per share, a year earlier.

Excluding one-time items, the company earned $1.56 per share, beating the average estimate of $1.50.

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