PepsiCo Beats Q3 Estimates but Slashes Full-Year Profit Outlook as North America Recovery Stalls

PepsiCo reported third-quarter net revenue of $25.27 billion, up 5.6% year over year and ahead of the Wall Street consensus of $24.96 billion, while core earnings per share of $2.34 topped estimates of $2.29 to $2.30. GAAP net income rose to $3.05 billion, or $2.23 per share, compared with $2.6 billion, or $1.90 per share, a year earlier. Operating income climbed 19% to $4.26 billion, and free cash flow for the first three quarters reached $5.86 billion, more than double the $3.24 billion recorded in the same period a year ago.

Despite the headline beats, organic revenue grew only 3.1%, missing the 3.8% analyst estimate, and core operating margin contracted 35 basis points year over year to 16.9%. The weak spot was North America: PepsiCo Foods North America posted flat revenue of $6.5 billion, while snack categories including Doritos and Cheetos remained soft and domestic soda volumes lagged rivals. Management cut the full-year core EPS growth outlook to a range of 2.5% to 3.5%, down sharply from the prior guidance of at least 5% to 7%, and trimmed core constant-currency EPS growth to 1% to 2% from the prior floor of 4% to 6%. The company did raise its full-year net revenue growth forecast to approximately 6% and narrowed organic revenue growth guidance to about 3%.

International divisions carried the quarter. Latin America Foods rose 14% to $3.02 billion, Asia Pacific Foods advanced 10% to $1.2 billion, and EMEA grew 8% to $5.41 billion. CFO Stephen Schmitt said international operations now account for 45% of company profit year to date, with global beverage volumes up 3%. CEO Ramon Laguarta, speaking exclusively on CNBC, said the company is "clearly dissatisfied" with its North American performance and ruled out splitting the snacks and beverages businesses, dismissing speculation that had emerged following a New York Times report about options under review.

Management said structural cost-reduction actions have been identified and will be implemented in the coming months, with capital spending held below 5% of net revenue and a free cash flow conversion target of at least 80%. Jefferies maintained a Hold rating with a $152 price target. At least one analyst warned that PepsiCo is ceding beverage market share to Coca-Cola. Shares rose roughly 2.2% in premarket trading on the earnings beat before paring some gains as investors weighed the lowered profit outlook.