LDN - Business

PepsiCo forecasts surprise drop in profit as it ramps up investments

[February 15, 2019] By Aishwarya Venugopal

(Reuters) - PepsiCo Inc forecast a surprise drop in full-year profit on Friday, as the snack and beverage company spent heavily on marketing and developing new products in a bid to claw back market share from Coca-Cola Co Inc.

The company has boosted advertising for its colas - Pepsi, Diet Pepsi and Mountain Dew - and is also investing heavily in its snacks business to offer products with new flavors, healthier preparation methods and attractive packaging.

The investments in advertising and innovation is driving strong growth for core products, Chief Financial Officer Hugh Johnston told Reuters.

"(This) has caused us to want to invest more money back into the businesses in 2019 and that is why our guidance has landed where it has."

The company said it expects 2019 adjusted profit per share to drop 3 percent to $5.50, while analysts on average had expected a 3.5 percent rise to $5.86 per share, according to IBES data from Refinitiv.

The forecast also takes into account a higher tax bill and a 2 percentage point hit from a stronger dollar.

Stripping off the forex impact and acquisition costs, the company forecast a 4 percent growth in operating revenue this year, higher than the 3.7 percent growth in 2018.

Coca-Cola also warned on Thursday that its earnings per share could fall in 2019, citing a stronger dollar. The forecast pushed its shares down nearly 9 percent.

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Bottles of Pepsi are pictured at a grocery store in Pasadena, California, U.S., July 11, 2017. REUTERS/Mario Anzuoni/File Photo

PepsiCo's shares were up 1 percent in early trading on Friday.

"As was the case yesterday with Coca-Cola, all eyes are on PepsiCo's 2019 outlook. While organic sales growth guidance suggests topline strength should continue, EPS suggests the cost of achieving that growth is increasing," Wells Fargo analyst Bonnie Herzog said.

In the October-December period, the company's first quarter under new Chief Executive Officer Ramon Laguarta, sales in its sluggish North America beverages unit rose for the second straight quarter, benefiting from demand for Pepsi sodas, LIFEWTR and bubly sparkling water and Gatorade Zero.

However, operating profit at the unit fell 12 percent in the fourth quarter.

Revenue and profit were in line with expectations. The company also announced a 3 percent hike in annual dividend to $3.82 per share.

(Reporting by Aishwarya Venugopal in Bengaluru; Editing by Bernard Orr and Saumyadeb Chakrabarty)

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