PURCHASE, NY. — Foodservice closures and a slowdown in consumer traffic to convenience stores and gas stations due to the coronavirus (COVID-19) pandemic hindered PepsiCo, Inc.’s second-quarter performance. The headwinds pressured the company’s North American beverage business, in particular, which saw organic sales fall 7% and organic volume fall 10% during the quarter ended June 13.
PepsiCo’s net income fell to $1.7 billion, equal to $1.18 per share on the common stock, during the quarter from $2 billion, equal to $1.44 per share, during the same period of the previous year.
Second-quarter sales fell to $16 billion from $16.5 billion the year prior.
“The months of March and April were particularly challenging as overall global economic growth was contracting and restrictions, closures and the resulting impact on consumer mobility had a significant effect on our performance,” said Ramon Luis Laguarta, chairman and chief executive officer. “However, we saw an improvement in our business performance and channel dynamics in May and June as population mobility increased after many economies gradually began to reopen both in developed and in developing markets.”
Hugh F. Johnston, vice chairman and chief financial officer, added, “Our second-quarter results were impacted by disruptions due to retail closures and other restrictions put in place as a result of COVID-19. In addition, our business experienced higher labor, personal protective equipment, logistics and service costs associated with COVID-19. These costs, coupled with an adverse channel mix shift in key markets, impacted our operating margin in the second quarter. We expect some of these costs to persist and remain committed to making the necessary long-term investments to support our employees and customers while also investing in capabilities that drive competitive advantages for our business.”
With consumers spending more time at home, PepsiCo’s snacks and food businesses had a strong quarter. Frito-Lay North America sales rose to $4.3 billion from $4 billion the year prior, and business unit operating profit rose to $1.28 billion from $1.25 billion.
Quaker Foods North America business unit sales rose to $664 million from $540 million the year before. Operating profit was $196 million, which compared favorably with $127 million the year before.
“Organic revenue at Frito-Lay North America grew 6%, and we gained market share in salty, savory and macro snacks in the quarter,” Mr. Laguarta said. “Frito's net revenue growth was broad-based across all our major brands, including double-digit growth in Tostitos, Fritos and Cheetos, high single-digit growth in Ruffles and mid-single-digit growth in Doritos. Emerging brands such as Bare and Off The Eaten Path also delivered double-digit growth.
“Our larger pack sizes and multipacks performed very well as consumers' desire for variety continued to grow. In addition, Frito's performance in large-format channels was strong, which more than offset the declines in the convenience and gas and away-from-home channels.”
The Quaker Foods North America business unit increased share performance during the quarter despite supply constraints on some products.
“Quaker was also able to increase household penetration during the quarter,” Mr. Laguarta said. “And many of our Quaker's categories have grown even as economies reopened during the later parts of the quarter with consumers purchasing and incorporating these products into their repertoire of food consumption. We also have strong plans in place to retain incremental households with marketing and activation plans across the Quaker portfolio during the balance of this year, including the launch of Cheetos Mac ‘n Cheese this coming fall.”
PepsiCo Beverages North America sales fell to $5 billion from $5.3 billion the year prior. Operating profit during the quarter fell to $397 million from $690 million. Sales declines in the convenience, gas and foodservice channels more than offset business unit growth in other channels such as grocery, mass merchandisers and dollar stores, according to the company.
“Now as we look ahead for North America, we expect our overall business to perform well, assuming there's no large-scale disruption in economic activity or population mobility as a result of the recent surge in COVID-19 infections in many markets,” Mr. Laguarta said. “With this in mind, we expect our snacks and food businesses to remain resilient, albeit with some moderation in growth, while our beverage businesses should deliver better performance during the second half of this year.”
PepsiCo’s Latin America, Europe, and Africa, Middle East and South Asia business units all experienced sales declines during the quarter. The company’s Asia Pacific, Australia and New Zealand and China Region unit saw sales rise during the quarter.
“We do expect an uneven recovery in international markets as a greater level of macroeconomic uncertainty will likely persist due to varying responses and measures by country to address pandemic-related impacts and population mobility, a greater volatility in travel and tourism trends and greater differences in disposable income and affordability,” Mr. Laguarta said. “These are two metrics we'll be keeping a very close eye on as and when we consider surgical adjustments to offer great value in lower-income markets.”
While the company is not offering formal guidance, Mr. Johnston said that during the third quarter of fiscal 2020 management is expecting organic revenues to increase within a low single-digit range.
“We expect our core operating margin to contract, albeit at a less severe rate than what we experienced during the second quarter as greater costs associated with keeping our employees safe persist,” he said. “And we expect foreign exchange translation headwinds to negatively impact our net revenue and core earnings-per-share performance by 3 percentage points.”