PepsiCo's bet on price cuts, brand refreshes pays off; flags Iran war cost risks

PepsiCo’s price cuts for salty snacks in the U.S. ​and resilient demand for diet sodas helped it top Wall Street estimates, providing a buffer against growing macroeconomic uncertainty and the ‌threat of higher costs due to the Iran war.

Affordability has taken center stage as consumer goods makers lower entry-level price points on snacks, sodas and pantry staples with middle- and lower-income customers struggling with a higher cost of living.

PepsiCo cut prices by up to 15% on brands such as Lay’s and Doritos in February to address concerns over ​multiple hikes and win back shelf space at retailers, driving the first rise in volumes in the North America foods category in ​at least a year.

The division has struggled over the last few years as budget-strained consumers traded down to cheaper ⁠brands or switched to healthier alternatives.

CEO Ramon Laguarta has also launched a cost-cutting effort that includes trimming its product lines and shutting some production ​centers to simplify its North America supply chain amid pressure from activist investor Elliott Management.

The company still has work to do on reducing costs, Chief Financial ​Officer Steve Schmitt said on a post-earnings call.

“(The results) offer early proof point that price cuts & innovation are working. If positive top-line trends persist, (temporary) cost pressures may not matter,” Jefferies analyst Kaumil Gajrawala said.

WAR CASTS A SHADOW

However, worries linger around the fallout of the Iran war on global consumer goods companies as energy costs surge and raw ​materials such as the PET resin used to package drinks become pricier. The risks add to the uncertainty from U.S. tariffs.

PepsiCo typically hedges for about ​nine to 12 months on packaging raw materials and expects some near-term protection.

“As we look ahead, the macroeconomic environment has become more volatile and uncertain because of ongoing ‌geopolitical conflicts,” ⁠Schmitt said in a statement.

Schmitt did not rule out price hikes to mitigate the cost inflation from the war, but reiterated that price hikes were the last lever the company would pull.

The beverage and snacks giant’s shares were up about 1% at $156.29 in morning trading on Thursday.

The higher cost of living could also push consumers to be more frugal, analysts and investors have said, forcing companies to be prudent about their expectations for the year as commodity ​inflation makes lower prices more difficult ​to sustain.

PepsiCo expects organic revenue to ⁠increase between 2% and 4% and core constant currency earnings per share to grow 4% to 6%, reaffirming its annual targets for a second time this year.

BRAND REFRESH

PepsiCo on Thursday also announced a refresh of the Gatorade energy ​drink brands, including new low-sugar formulas, as companies appeal to increasingly health-conscious consumers amid the Make America Healthy ​Again movement and ⁠the rising popularity of GLP-1 weight-loss drugs.

The company rebranded Lay’s to highlight no artificial flavors and launched Gatorade Lower Sugar last year.

North America foods category volume swung to growth, up 2% in the reported three-month period, compared with a 1% drop in the fourth quarter. North America beverage volumes were down 2.5%, but ⁠improved quarter-on-quarter.

For ​the 12 weeks ended March 21, the company’s core adjusted operating margin was 15.7%, compared ​with 13.9% in the prior quarter.

The company said first-quarter revenue rose 8.5% to $19.44 billion, compared with estimates of $18.94 billion, according to data compiled by LSEG. Its quarterly adjusted earnings per share ​of $1.61 also handily beat estimates of $1.55.