Salty snacks strength buoys Frito-Lay results

by Eric Schroeder
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Lay's, Doritos and Cheetos showed revenue growth.

PURCHASE, N.Y. — The North American food business at PepsiCo got off to a mixed start in fiscal 2015, as Frito-Lay North America posted another strong quarter of growth but Quaker Foods North America struggled amidst challenges in the center of the store categories.

In the first quarter ended March 21, operating profit within Frito-Lay North America was $920 million, up 7% from $862 million in the same period a year ago. Net revenue in the division increased 3% to $3,319 million from $3,219 million.

“The U.S. salty snacks category continued to show solid growth, and Frito market share again posted steady sequential improvement supported by both volume growth and price realization,” Indra Nooyi, chief executive officer of PepsiCo, Inc., said during an April 23 conference call with analysts. “Our key brands had revenue growth, including particularly good performance from Lay’s, Doritos and Cheetos. And we continue to innovate. We launched Cheetos Sweetos, the first ever sweet Cheetos, in the U.S. as well as Tostitos Dip-etizers, Doritos Jacked 3D and Rold Gold Pretzel Dippers.”

Meanwhile, operating profit within Quaker Foods North America fell 38% to $99 million from $160 million, while sales inched up 1% to $639 million from $634 million.

“Quaker Foods North America delivered commendable results despite continued challenges across center of store food categories,” Ms. Nooyi said. “During the quarter we gained or held value share in all three of our key categories — hot, ready-to-eat cereals and snack bars — while expanding gross margin at the same time. These value share gains were driven by innovation, which includes the launch of Quaker 3-minute steel cut oats in the quarter. This product has the same hearty texture and nutty flavor as traditional steel cut oats, but caters to the consumer’s need for convenient products as the cook time is cut from 30 minutes to just 3 minutes. We also launched gluten-free varieties of Quaker Popped Rice Crisps.”

Given some of the challenges in the center of the store, and Quaker Foods North America specifically, Ms. Nooyi was asked by an analyst during the call whether PepsiCo still sees all of its center of the store food brands as core to the company’s mission.

“I think there are two kinds of businesses I said were not core to the mission,” she said. “Quaker is very core to the mission. What we were talking about is sort of the peripheral businesses we got as part of the Quaker Oaks acquisition — the Golden Grain and the Aunt Jemima.

“Those businesses are center of the store. They are not core to our portfolio, but today they are doing fine. They are holding their ground, sometimes even gaining share. They are generating very valuable U.S. cash flow, and these are businesses with fantastic margins. So at this point it is more dilutive to get rid of them than to keep them. And so, what we are going to do is just manage those businesses steadily as long as they don’t distract us from our core mission of growing the rest of the portfolio. That is what we are focused on.

“And lastly, they also provide scale to our warehouse sales operation. So at this point just steady management of those businesses, don’t distract ourselves from the core, enjoy the U.S. cash, the good margins and that is all we are doing.”

Overall, net income at PepsiCo, Inc. in the first quarter ended March 21 was $1,221 million, equal to 81c per share on the common stock, up narrowly from $1,216 million, or 79c per share, in the same quarter a year ago. Net revenue was $12,217 million, down 3% from $12,623 million.
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