Q1 Steady (PEP) – Waiting for the inflection
PepsiCo reported Q1 EPS of $1.61 vs. consensus expectations of $1.52. Organic revenue growth was +2.7%, lapping 14.3% in the prior year. The Quaker Foods recall was a 1% drag, with its sales down 24%. The North American segments trailed the international segments. Frito Lay N.A.'s organic revenue growth was 2%, and profits declined by 2%, while PepsiCo Beverages N.A.'s organic revenue growth was 1%, and operating profits increased by 7%. The International convenient foods had organic revenue growth of 9%, while beverages grew 10%. Operating margins for International expanded by 180bps. Core gross margins expanded by 35bps while operating margins expanded by 40bps. Margin expansion narrowed from +95bps in Q4.
Management said, “Chinese consumers are being very cautious.” In regards to U.S. consumers, management said, “The lower income consumer in the U.S. is stretched… is strategizing a lot to make their budgets get to the end of the month.”
The company reaffirmed guidance for organic revenue to grow by at least 4% and EPS to grow by at least 8%. Management expects to see the categories’ growth rates moderate, while international growth outpaces N.A growth. PBNA’s margin opportunity remains a strategic focus. PepsiCo is on our long list with two dominant franchises and a margin expansion opportunity, which may be waiting for an inflection in volumes.
More to come after Q1 (KMB) – Removing from Short Bias
Kimberly-Clark reported Q1 EPS of $2.01 vs. consensus expectations of $1.63. Organic revenue grew by 6%, above consensus of 2.4%. Price increased by 4%, mix by 1%, and volume by 1%. Organic growth trends accelerated sequentially driven by price, but volumes inflected positively, as seen below:
In North America, volumes remained positive in the Personal Care and Consumer Tissue segments. In Personal Care, 7% of the price growth was driven by hyperinflationary markets. Volume growth was driven by North America and China’s double-digit increase (Chinese New Year). In Consumer Tissue, input cost tailwinds and productivity initiatives drove an operating margin expansion of 340bps. In K-C Professional, an operating margin expansion of 400bps was driven by pricing, focusing on rightsizing businesses, and investing in others.
Gross margins expanded by 390bps, improving from +210bps sequentially. Commodity inflation is expected to be $250M annually due to pulp and fiber. Operating margins expanded by 230bps.
Management raised guidance for the top and bottom lines but did not fully pass through the upside in Q1. Organic sales are now expected to grow by MSD%, which is up from +LSD-MSD% previously. Fx will be a 4% headwind, 1% more than the previous assumption. EPS growth is now expected to increase in the low teens from +HSD%. Fx will be a 7% headwind for EPS growth, 3% more than the previous assumption.
Kimberly-Clark is removed from our Short Bias list. Our model sees further upside in our model, extrapolating the momentum in Q1.
Q1 Less Smoke, More Fire (PM) – Buy the transformation
Philip Morris reported Q1 EPS of $1.50 vs. consensus of $1.41. The upside was driven by better revenue growth driven by growth in non-combustibles and steady trends in combustibles. Revenue was 4% above expectations. Total volumes grew by 3.1%, above expectations of +0.8%. On revenue growth of 9.7%, gross profits grew by 12.4%, and operating profit grew by 11.5%.
Combustibles
Combustible organic revenue grew by 3.7%, driven by price increases. Cigarette volumes decreased by 0.4%, better than consensus expectations of -1.8%. Gross profit in the segment grew by 2.3% organically.
Non-Combustibles
Non-combustible organic revenues increased by 24.8%. Oral smoke-free volumes grew by 40% in cans. HTU volumes increased by 20.9%, reaccelerating from 6.1% sequentially. Earlier shipments due to the Red Sea disruption are expected to normalize later in the year. IMS volumes increased by 12.5%. Zyn’s growth in the U.S. was +79.7% YOY. Its category share gained 1.3% to 74%. Volume expectations were raised from 520M cans to 560M. In Japan, IQOS market share increased by 3% to over 29%, and IMS growth was 13.3%. Gross profit in the segment grew by 37.5% YOY organically.
Outlook
Organic revenue growth is expected to be 7-8.5% from 6.5-8% previously. Combustibles are now expected to grow. Weakness in Egypt’s and Japan’s currencies caused management to raise the Fx headwind by $.25. The company is planning to raise prices to offset the currency headwinds. Adjusted EPS excluding Fx is now expected to be between $6.55-6.67 from $6.43-6.55. A beat and raise after Q1 results show management’s optimism for the year, while the market’s perceptions are lagging behind the transformation at PMI. The reacceleration in HTUs alleviates the largest concern from the Q4 report. We recently added the company to our Best Idea long list and presented our case in a Black Book. Our investment thesis for PMI:
GROCERY DELIVERY (WMT)
Amazon announced that Prime members in 3,500 cities and towns can subscribe for unlimited grocery delivery on orders over $35 for $9.99 monthly. The new offer matches Instacart’s membership plan. Walmart Plus costs $12.95 per month or $98 per year, and Target’s delivery plan costs $99. $120 for grocery delivery is unlikely to increase the TAM dramatically. The grocers benefit as long as the competitive intensity is limited to digital instead of CPG items. In the U.K., the percentage of items purchased on promotions reached 29.3%, the highest outside the Christmas holidays since June 2021.
