PepsiCo still has 'a lot of wood to chop': Q2 was 'not good'

Yahoo

6 days ago

PepsiCo (PEP) stock jumps after reporting stronger-than-expected earnings results, driven by international sales amid weakness in North America.
RBC Capital Markets managing director Nik Modi joins Market Catalysts to examine the earnings print in the context of the challenging landscape the wider food and beverage industry faces.
To watch more expert insights and analysis on the latest market action, check out more Market Catalysts here.
PepsiCo rising after topping second-quarter estimates and reiterating its full-year outlook. The maker of Lays and Gatorade citing strong international growth for the results. Joining me now is Nick Modi, RBC Capital Markets managing director. Nick, good to see you here. You got a sector perform on this one, price target of $146. Um, when you look at the volumes here, kind of, kind of lackluster, what do you think is going on with Pepsi? What is your sort of biggest takeaway?
Yeah, I mean, look, this has been a general theme that's been going across the entire consumer goods space. Um, grocery inflation has outpaced wage growth, going back to when we got out of the pandemic. And I think that's made groceries literally less affordable in the eyes of the consumer. And so, in those circumstances, a consumer looks for value. Now, when you think about what's happened to a bag of potato chips or Doritos or any other salty snack, uh, for that matter, the prices have gone up quite a bit. Um, or there's product that's come out of the package. And, I think consumers have noticed, and so they're making choices. They're either going to private label, or they're maybe even going to protein forward snacks, just given uh, the rise of the interest in protein as we have an aging population, but also because of GLP1s. So I think all of that is contributing to Pepsi's volume weakness. Um, looks like they're starting to reinvest back into promotions and drive some, some improved volume. Uh, so sequentially it got better from the first quarter, but we still think they have a lot of wood to chop to, to get their, uh, business back to growth.
Does the stock price reaction today, that 6% boost, does that make sense to you?
Listen, I, the expectations were incredibly low coming into the quarter. Um, and, and that's a function of many other food companies having very disappointing results. General Mills, Smuckers, uh, uh, Conagra, for example. Um, so I think what's happening today is just a reaction to it being not as bad as everyone thought. But let's not kid ourselves, these were not good results uh, in, in an absolute sense. Um, and so we feel very comfortable with our sector perform at this point.
And Nick, um, we've seen a lot of changes in the food industry in terms of, of remaking a various conglomerates, right? You know, sort of splitting up, spinning off brands, etc. Is, is that what Pepsi needs to do also?
I don't think Pepsi necessarily needs to do that. I mean, I, I think a lot of Pepsi's issues are macro driven. Uh, I think there's some probably some strategic missteps they made around innovation. Um, and I think they need to expand their product portfolio to include other snacking substrates like cauliflower and edamame, uh, but also be more protein forward. So, I don't really think they need to have any massive corporate action um, like you're seeing with some of the other companies in the sector right now.
Well, and you mentioned the macro. Um, you know, is it just tough to be in the snack business right now because of those trends, or is it just a matter of they're not leaning into some of the micro trends that, that you alluded to, the sort of quote-unquote healthier snacks or the protein forward snacks?
I think it's a little bit of both, right? It's hard to quantify what structural versus cyclical, but I would say the cyclical element is very high uh, because it's not just Pepsi that's struggling. Almost all of my companies uh, across the entire consumer goods landscape are feeling volume pressure right now. Uh, so that's why I believe that this is a, a very big cyclical issue. Um, and so as we start getting into a better, more normalized consumer environment, whenever that comes, uh, I, I certainly think you'll see some volume improvement.