Pepsi reported net revenue of $17.9bn over the first quarter, up 1.2% on an organic basis. This was driven by higher average prices and a favourable change in its accounting practices, which more than offset declining volumes.
Underlying operating profit fell 5.1% to $2.8bn, due to costs rising faster than revenue.
Free cash outflows improved slightly from $1.7bn to $1.6bn. Net debt increased by $4.9bn to $39.9bn since the beginning of the year.
For the full-year, PepsiCo still expects a low single digit increase in organic revenue. But due to “higher supply chain costs related to tariffs”, earnings per share (EPS) guidance has been lowered, now expected to be in line with the prior year.
Pepsi intends to return $8.6bn of cash to shareholders in 2025, through a combination of dividends and share buybacks.
The shares fell 1.3% in pre-market trading.
Our view
First-quarter results were boosted by some favourable accounting which helped to flatter sales growth figures. But it failed to mask an overall underwhelming performance. Alongside rising costs, that’s seen full-year profit targets trimmed just one quarter into the year.
After a period of pushing through sharp price hikes, especially in the US, Pepsi is struggling to grow its volumes. We see more pain on this front in the near term as consumer demand softens and expectations rebase. Growth from a more sustainable mix of price and volume would be welcome, but nothing is guaranteed.
Pepsi had previously relied on cost-cutting initiatives to help keep profits moving higher. But these were always more like plaster than a long-term solution. Tariff-induced volatility and rising supply chain costs are the straws that broke the camel’s back, causing profits to fall and full-year guidance to be trimmed.
There are some reasons to be positive though. Unlike rival Coca-Cola, it doesn't limit itself to soft drinks. Pepsi's products include snack brands such as Walkers crisps and Doritos. Pepsi’s wide range of top-quality brands can help soften the blow if any one brand underperforms.
It’s also worth noting that Pepsi's business model varies considerably by region. It'll manufacture products in some markets, and in others, it hands over almost complete control to a licensing partner - such as Britvic in the UK. On the one hand, that makes Pepsi more capital intensive thanks to investments in factories and production equipment, increasing risk, but it's also allowed manufacturing processes to benefit from scale.
At nearly $40bn, net debt is higher than we’d like. It’s not cause for concern at the moment, but we’d hope to see this start to come down again, especially as interest rates look set to remain higher for longer, which increases the cost of rolling this debt over.
We consider Pepsi's variety of brands and history of strong execution a real bonus. But with volumes struggling, we're likely to see the rate of price hikes slow in the near term, and revenue and profit growth along with it.
Pepsi's valuation is sitting well below its long-term average, reflecting the current struggles. With little sign of a positive catalyst in the near term, we can’t rule out further downgrades to guidance this year. While PepsiCo’s strong brands shouldn’t be overlooked, we think other names in the sector are better positioned to ride out the current market volatility.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry-wide, especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.
According to Sustainalytics, Pepsi’s management of ESG risk is strong.
The group has strong anti-bribery and adequate human rights policies in place. Despite this, Pepsi is involved in significant human rights issues within its supply chains. Pepsi is also exposed to food safety issues that could result in customer health impacts and associated lawsuits which could potentially damage the brand and lead to financial repercussions.
PepsiCo key facts
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