FQ3 - What can be controlled (PEP)
PepsiCo reported FQ3 EPS of $2.25, representing 16% growth YOY, vs. consensus expectations of $2.15. Organic revenue grew 8.8%, in line with consensus expectations of 8.7% growth. Volume trends improved sequentially to -1.5% from -3%.
- Frito Lay N.A. organic growth +7%, volume -0.5% (Q2 vol. +1%), price +8%.
- Pepsi Beverage N.A. organic growth +6%, volume -6% (Q2 vol. -4.5%), price +12%.
- Quaker Foods N.A. organic growth +5%, volume +1% (Q2 vol. -5%), price +4%.
- Latin America organic growth +9%, volume -5% for food and +5% for beverages (Q2 vol. -3%/+2%), price +14%.
- Europe organic growth +13%, volume +2% for food and flat for beverages (Q2 vol. +2/-1%), price +13%.
- AMEA & South Asia organic growth +17%, volume -3% for food and +3% for beverages (Q2 vol. -6%/-3%), price +18%.
- APAC organic growth +9%, volume -1% for food and +1% for beverages (Q2 vol. -4%/+7%), price +7%.
Gross margins expanded 105bps in FQ3 compared to 130bps in FQ2. Operating margins expanded 80bps in FQ3 compared to +45bps in FQ2.
Management maintained revenue guidance and raised EPS growth guidance to +13% from +12%. Management also expects 2024 to be at the high end of long-term growth targets of 5-6% revenue growth and 8-9% EPS growth. Management expects price increases next year will be in the range of historical inflation, ~2-3%. PepsiCo’s shares have declined 12% since the previous earnings report. What the company can control has not been a concern. PepsiCo’s visibility in growing revenue above its long-term targets and passing on inflationary pressures to protect margins is higher than the market’s assessment.
Private-label pet food (POST)
Post Holdings announced the acquisition of Perfection Pet Foods, a private label and co-manufacturer of pet food, for $235M. The acquisition includes two manufacturing facilities, which will allow Post to insource more production. Perfection Pet Foods is expected to add $25M of EBITDA in the first year, representing an acquisition valuation of 9.4x. It appears to be well-timed for Post to add private label capacity in the pet food category. As long as the pet owner does not feel guilty, the pets will not know the difference.
Not quite the plan (RGF)
Real Good Foods reported preliminary FQ3 results that were slightly below guidance and revised Q4 by a similar amount. Revenue for FQ3 is expected to be $55-57M vs. $60-65M previously. EBITDA is expected to be $0-2M vs. consensus of $2.6M previously. The company said sell-through grew 90% YOY, but shipments could not keep pace and only grew 50%. Real Good Foods outlined current category sales trends, the market size, and future potential in refrigerated entrees, frozen poultry, and frozen seafood.
Management revised FQ4 guidance for revenue to $65-72M from $70-77M. Adjusted EBITDA is expected to be between $4-6M vs. consensus expectations of $5.6M. For F2024, management guided revenue to at least $245M and adjusted EBITDA of at least $15M, in line with consensus expectations.
The company projects a cash balance of $2M on September 30 (FQ3 end), with working capital a larger use during the quarter. Management expects the company to have positive operating cash flow in Q4 and continuing into F2024. The company announced a share offering in conjunction with the preliminary results. Real Good Foods needed a strong quarter to sell equity at a higher price and reduce leverage. The company’s valuation reflected the challenge of rapid growth and working capital needs with an undercapitalized balance sheet. Sell-through in the quarter appears to have delivered the desired upside, but the timing of shipments and promotions caused revenue to fall short. The company’s balance sheet was the biggest risk to achieving its long-term plans. We have been waiting for an equity offering to deleverage the company before adding it to the Long list.
