Strong PepsiCo earnings growth prompts guidance hike

by Josh Sosland
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PURCHASE, N.Y. — Driven by broad sales and volume gains, third-quarter earnings at PepsiCo, Inc. grew at a double-digit rate in the period ended Sept. 9. Earnings guidance for 2006 was raised by the company.

Net income in the third quarter was $1,481 million, equal to 88c per share on the common stock, up 71% from $864 million, or 51c per share, during the third quarter last year. Excluding a special 27c tax charge during the third quarter last year, earnings were up 12%.

Net sales in the third quarter were $8,950 million, up 9% from $8,184 million during the third quarter last year.

"We are very pleased with our performance for the quarter, especially as we are cycling very strong performance from the third quarter of 2005 — when revenue was up 13% and division operating profit increased 14%," said Indra Nooyi, PepsiCo chief executive officer. "Each of our businesses had very strong top-line growth. Our International business in particular performed very well, with double-digit sales and operating profit gains."

Ms. Nooyi became chairman of PepsiCo, effective Oct. 1, succeeding Steve Reinemund, who remains chairman of the board until his retirement next May.

Expressing great confidence in prospective results for the balance of the year, Ms. Nooyi projected 2006 earnings to at least $2.98, equating to a double-digit gain from core 2005 profits and up 5c from guidance issued at the start of the year.

Among the PepsiCo divisions, strong earnings were achieved in the third quarter with the exception of the company’s beverage business. Operating profit declined 4%, pressured by higher orange costs (adversely affecting the Tropicana business), rising supply chain costs for the Gatorade business and increased discretionary marketplace investment at Pepsi Beverages North America. Dollar sales climbed 3.5% while operating profit declined 4%.

Volume growth of 4% was driven by a 13% increase in non-carbonated beverages, partially offset by a 2% decline in carbonated soft drinks in the quarter. Particularly strong were sales of Aquafina, Lipton and Propel.

Frito-Lay North America operating growth largely was in line with volume growth, offset somewhat by advancing commodity costs, primarily energy and cooking oil. Net sales were up 7% from the third quarter last year while operating profit gained 6%.

Propelling growth at Quaker Foods North America were double-digit growth in oatmeal, high-single-digit growth in Aunt Jemima syrup and mixes and mid-single-digit growth in ready-to-eat cereals. Curbing the operating profit gains were higher raw material and energy costs. Net sales were up 10% and operating profit jumped 11%.

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