PepsiCo posted better-than-expected third-quarter results before the opening bell on Thursday. For the quarter ended Sept. 5, revenue rose 5.6% to $25.27 billion, topping the roughly $24.96 billion analysts expected. Core earnings per share came in at $2.34 versus the $2.30 consensus, and GAAP net income was $3.05 billion, up from $2.6 billion a year earlier. Organic revenue grew 3.1%, also beating expectations.
The beat was immediately overshadowed by a sharp guidance cut. On a constant-currency basis, PepsiCo now expects full-year core EPS growth of just 1% to 2%, down from the low end of its prior 4% to 6% range. Including currency effects, the target is 2.5% to 3.5% growth. Full-year organic revenue growth is now expected to be about 3%.
CEO Ramon Laguarta acknowledged the weak spot in prepared remarks: "Our business in North America performed below our expectations and represents a meaningful opportunity for improvement." He said the company would build on the strength of its international business while acting "with urgency to sustainably improve our performance in North America." CFO Steve Schmitt warned that North America's core operating margin would remain under pressure in the fourth quarter.
The company said North American trends improved from the second quarter, with new product launches and lower prices lifting snack volumes, while strong sales of functional and zero-sugar drinks offset softness in traditional sodas. It was not enough to keep the full-year outlook intact.
The North American slowdown has multiple causes. Reuters pointed to inflation-weary consumers cutting back on snacks and drinks, while rising input costs kept squeezing margins. Barron's noted that high inflation has disrupted the company's U.S. pricing strategy.
A more structural threat is shifting eating habits driven by GLP-1 weight-loss drugs. PepsiCo's enterprise value-to-EBITDA multiple has fallen from 18 times in mid-2022 to 10 times, while rival Coca-Cola continues to command a premium valuation.
Shares rose about 1% premarket to $125.05, according to Barron's, but the stock is down 12% to 14% this year, near its lowest since 2020. JPMorgan downgraded the stock to Neutral ahead of earnings, cutting its price target to $138 from $170; Deutsche Bank made a similar cut to Hold with the same $138 target in the same week.
TD Cowen analyst Robert Moskow said Frito-Lay's heavy investments in pricing, new products, expanded distribution and marketing came in "well below" expectations: "Sales remain flattish, and they're losing market share."
To win back demand, PepsiCo cut suggested retail prices by up to 15% on brands including Lay's and Doritos earlier this year, and plans low- to mid-single-digit percentage price increases on some snacks late this year or early in 2027 to keep up with inflation. It is pushing zero-sugar drinks and higher-protein, higher-fiber snacks to meet demand for high-protein products without artificial colors or flavors.
The company also said it is identifying additional structural cost cuts to fund investment, accelerate organic revenue growth and offset input cost inflation. Activist investor Elliott Management, which disclosed a $4 billion stake last year, is pressing for faster growth and better margins — patience is wearing thin.