Before the opening bell on April 26, PepsiCo (PEP) released operational results for its first quarter of fiscal year 2012. The results came in better than the Street was expecting on both the top and bottom lines. For the first quarter, PepsiCo earned $0.69 per share (excluding items) above the Street's $0.67 per share forecast, but in line with my forecast. Here's my earnings preview for PepsiCo. Earnings were down from $0.74 per share during the first quarter of 2011. On the top line, the company reported revenue of $12.43 billion, above my forecast of $12.39 billion and the Street's $12.35 billion estimate.
The revenue growth comes as a result of strong growth in the Europe and Asia, Middle East & Africa (AMEA) segments, primarily as a result of the Wimm-Bill-Dann acquisition, which was completed during the third quarter of 2011. The revenue growth comes on the back of strong volume gains in Europe and AMEA; however, revenue growth in the other segments comes on the back of higher prices. The following table outlines the segments' year over year revenue growth:
Management has increased prices for many of its products over the past several months to account for higher commodity prices. Despite the price increases, PEP still saw operating margins decline in each of its segments compared to the first quarter of 2011. Higher commodity prices forced cost of goods sold 9.1% higher year over year, which pressured gross margin. Despite slightly lower selling, general, and administrative expenses as a percentage of revenue, earnings still fell from the previous year.
Chairman and CEO Indra Nooyi said during the conference call "Effective pricing and packaging initiatives drove 5% constant currency net revenue growth, allowing us to substantially offset approximately $300 million in commodity cost inflation. With disciplined pricing now in place, we're doubling our focus on the other key initiatives for 2012. Our top priorities include stepping up our brand support through increased advertising and marketing, accelerating our innovation, and driving an aggressive productivity agenda that includes a significant restructuring program."
Volume was another area that the company performed relatively inline with expectations. Latin America Foods (LAF) remained strong, while Pepsi America Beverages (PAB) was down 1.0%. The following table shows the volume changes for PEP's segments for the past three quarters:
The biggest surprise to me was the 2.0% decline for Frito-Lay North America (GM:FLNA), which was affected by the increase in prices as well as the extra week compared to the first quarter of 2011. During 2011, the pre-New Year week was included in the fourth quarter of 2011 instead of the first quarter of 2012 (it was included in the first quarter of 2011). So excluding this result, volumes would have flat. For PAB, non-carbonated beverage volumes improved 1.0%, which was more than offset by the 2.0% decline in carbonated soft drinks. Additionally, volumes were adversely affected by pricing initiatives taken during the quarter.
All in all, it wasn't a bad quarter for PEP, but it wasn't a good one either. The Company is struggling to find direction right now. Higher commodity costs is forcing management to increase prices, which it has been reluctant to embrace as it negatively impact volumes. The Company has another two quarters of easy comparisons in Europe and AMEA, but the biggest yellow flag for me was the volume decline in FLNA (revenues improved 3.7% year over year). Volumes would have been flat save for the extra week, which is below the 1.0% growth the segment has enjoyed for much of 2011. FLNA accounts for more than 60% of the Pepsi Americas Food (PAF) segment and approximately 25% of total revenue. Volume weakness could put even more pressure on management to turn the ship around.
I still like PEP as an investment, however, it is more a safe dividend play at current levels, than an attractive investment for capital appreciation. I prefer the Coca-Cola Company (KO) as I like the growth prospects for KO better.