PepsiCo says investments to drive sales will dent profit

NEW YORK — PepsiCo, Inc. said on Friday increased investments in advertising and products aimed at boosting sales growth would lead to a fall in profit this year.

In his first major strategic move after taking over as chief executive officer, Ramon Laguarta unveiled plans to cut jobs and restructure plants to save $1 billion annually through 2023 and fund its investments in a bid to claw back market share from larger rival Coca Cola.

Shares of PepsiCo were up 2% in late morning trading as the company also reported better than expected core revenue growth, driven by higher demand for its Frito-Lay snacks and its beverages in North America.

Pepsi and Coca-Cola are spending heavily to market low-sugar colas and flavored waters to keep up with changing consumer preferences towards healthier beverages.

Although increased advertising is helping sales, it is pressuring margins that are already squeezed by rising commodity and freight costs.

“While organic sales growth guidance suggests topline strength should continue, earnings per share suggests the cost of achieving that growth is increasing,” Wells Fargo analyst Bonnie Herzog said.

The company said it expects 2019 adjusted profit per share to drop 3% to $5.50, while analysts on average had expected a 3.5% rise to $5.86 per share, according to IBES data from Refinitiv.

The forecast also takes into account a higher tax bill and a two percentage points hit from a stronger dollar.

Coca-Cola also warned on Thursday that its earnings per share could fall in 2019, citing a stronger dollar. The forecast pushed its shares down nearly 9%.

Sales in PepsiCo’s North America beverage unit, the company’s largest revenue contributor, rose 1% in the fourth quarter, benefiting from demand for Pepsi sodas, LIFEWTR and bubbly sparkling water and Gatorade Zero.

The investments in advertising and innovation is driving strong growth for core products, Chief Financial Officer Hugh Johnston told Reuters. —