Q1 highlights why it is a Quad 4 pick (PEP)
PepsiCo reported Q1 EPS of $1.29 vs. consensus of $1.23. Organic revenue grew 13.7%, accelerating from 11.9% sequentially, and was above consensus estimates of 9.6%. Organic revenue in North America grew 13% and in International markets grew 15%. Frito-Lay NA grew 14%, accelerating 1% sequentially. Quaker Foods grew 11%, accelerating 2% sequentially. PepsiCo Beverages NA grew 13%, accelerating 1% sequentially. All of the International segments accelerated sequentially except APAC which decelerated 4% to 9%, but still exceeded expectations.
Gross margins expanded 5bps, improving from 120bps of contraction sequentially. Frito Lay’s operating profit growth was 11% less than revenue growth due to higher commodity, transportation, and marketing costs. Beverages NA operating profit growth of 21% exceeded revenue growth by 8%. Quaker Foods operating profit growth of 6% lagged revenue growth by 5%. Management reaffirmed guidance, but noted Fx was an incremental 2% headwind to EPS growth.
PepsiCo is on our long list for the strength of its brands and network to navigate the current inflationary environment. Q1 results highlighted the company’s ability to expand gross margins, drive organic revenue growth and hit profit targets despite the difficult cost pressures. PepsiCo is an outperformer in Quad 4.
U.K. grocery sales (NOMD)
The latest take-home grocery report from Kantar shows that supermarket sales fell 5.9% over the 12 weeks ended April 17. For the first time since the pandemic began sales also fell 0.6% compared to two years ago as the comparison now includes a couple of weeks during the first part of the lockdown. Sales fell at all of the leading grocers YOY except at discounters Aldi and Lidl. Grocery price inflation increased 5.9%, the highest since December 2011. The percentage of items purchased on promotion has decreased 2.7% points to 27.3%. Morrisons is launching its biggest price cuts in recent years by reducing prices on 500 products covering 6% of sales volume with the average savings being ~13%. The U.K. is Nomad Foods’ largest market. In addition to the difficult sales comparisons, the weaker Euro is also a headwind.
Infant formula sale underway (RKT_LN, PRGO)
Bloomberg reported that Reckitt has begun the sale process for its infant formula business with bids due by the end of May. With prices up significantly, a competitor hampered by a facility shutdown, and shortages on retail shelves the current environment is an opportune time to sell the business. The article said the unit may receive bids up to $10B. Interest is expected to mostly come from private equity firms. The sale process may bring more attention to the business and to Perrigo.
