PepsiCo Earnings to Offer Glimpse of Global Consumer Sentiment
U.K. vote to leave EU adds to economic uncertainty
PepsiCo’s soda business has been losing ground in the U.S. after it changed artificial sweeteners. PHOTO: RICHARD B. LEVINE/LEVINE ROBERTS/NEWSCOM/ZUMA PRESS
Investors should get fresh clues to how economic volatility is affecting globe-trotting companies when PepsiCo Inc. reports its second-quarter results on Thursday.
The U.S. snack-and-beverage giant derives nearly half its sales from abroad, with a big presence from the U.K. to Russia to Brazil. Its potato chips, sodas and juices are everyday staples, making it an easy barometer for consumer sentiment. It is also reporting ahead of many other big companies.
PepsiCo has been able to navigate overseas turmoil until now by cutting costs, raising prices and leaning more heavily on its U.S. business. In 2014 and again in 2015, it increased its full-year earnings forecast when reporting second-quarter results.
But it is unclear if the company will revise its earnings guidance upward again after the U.K. voted to leave the European Union, which has heightened fears of a world-wide recession.
“My guess is they probably won’t this time around, because there’s so much uncertainty globally,’’ said Jack Russo, a consumer goods analyst with Edward Jones.
Morgan Stanley this past week estimated a 40% probability of a global recession in the next year, up from an earlier 30% forecast. S&P 500 companies are expected to report a 5.2% decline in second-quarter earnings from a year earlier, the fifth straight quarter of profit contraction, FactSet estimated.
PepsiCo is expected to report quarterly per-share earnings of $1.29, down from $1.32 in the year-earlier quarter, according to a Thomson Reuters survey of analysts who follow the company. Revenue is expected to drop 3.4% to $15.37 billion, hurt by weakening foreign currencies.
The maker of Lay’s potato chips and Pepsi-Cola declined to comment ahead of releasing its earnings. Chief Executive Indra Nooyi warned of a “difficult environment’’ globally and “sustained volatility and uncertainty’’ in April’s earnings call.
PepsiCo booked a $373 million impairment charge at its Chinese beverage joint venture in the first quarter. Many economists expect China’s second-quarter growth to fall short of the 6.7% year-to-year figure for the first quarter, its slowest quarterly pace since the 2008 global financial crisis.
PepsiCo also has estimated that Venezuela will have a negative impact of 2% on earnings this year after it booked a $1.36 billion impairment charge and deconsolidated operations in the recession-torn country last fall.
All of that was before the June 23 Brexit vote. The U.K. is PepsiCo’s fifth-largest market, generating 3% of company sales and low-single-digit volume growth last year. But economists warn the world’s fifth-largest economy faces twin risks of recession and inflation. That could cause ripple effects, with the International Monetary Fund cautioning this past week it might lower Germany’s growth forecast.
It isn’t just Europe that is nervous. Brazilian Central Bank PresidentIlan Goldfajn said this past week Brexit could hurt his country’s economy, which is already expected to shrink 3.3% this year. Brazil is PepsiCo’s sixth-largest market, generating 2% of revenue, and companies have been hoping for a sales lift from the country hosting the Olympic Games this August.
PepsiCo also is exposed to Russia’s struggling economy, its biggest market after the U.S. and Mexico. Russia’s central bank cut interest rates last month for the first time in nearly a year, fueling hopes the country’s economy will return to growth next year.
All of that overseas volatility is heightening pressure on PepsiCo to deliver growth in the U.S., which generated 56% of revenue in 2015. Personal spending in the U.S. rose 0.4% in May from a month earlier after a 1.1% jump in April, the sharpest rise in nearly seven years.
PepsiCo’s U.S. snacks unit had its strongest performance in more than a year in the four weeks ended June 18, with sales rising 5.9% over a year earlier, according to Wells Fargo, citing Nielsen store-scanner data. Some of that was fueled by the Memorial Day holiday, which wasn’t fully included in the year-earlier data.
The company has posted healthy sales growth in bottled water, sports drinks and teas but its soda business has been losing ground in its biggest market. PepsiCo’s U.S. carbonated soft drink sales contracted 3.4% in the 12 weeks ended June 18, worse than the 2.2% industrywide decline.
Much of the downturn has been tied to Diet Pepsi, whose sales slide accelerated after the company changed artificial sweeteners last August. It said this past week it will bring back the old recipe, but not before September.
PepsiCo estimated earlier this year that weaker foreign currencies would have a negative impact of 4 percentage points on 2016 results, less than last year’s 11% negative impact. Until recently, Joseph Agnese, an equities analyst at S&P Global Market Intelligence, figured foreign exchange could provide a lift by the end of the year. “Now it doesn’t look like it’ll be happening,’’ said Mr. Agnese, citing overseas uncertainty.
