PepsiCo Profit Up 12 Percent But Snacks Growth Slows

Published July 15, 2004

| Reuters

PepsiCo Inc. (PEP), the world's No. 2 soft drink company, said Thursday that quarterly profit rose 12 percent as improving trends in its beverage business helped offset slowing growth in snacks.

The stock dipped in Thursday morning trading, on concern over the North American snacks business, which has been hurt by sluggishness in Quaker brand products.

"Their biggest business is not hitting on all cylinders," said Mark Swartzberg, analyst at Legg Mason Wood Walker, referring to the North American snacks business. "In fact, it looks like it lost a cylinder."

Still, the company, whose products include Lay's potato chips, Gatorade and Pepsi-Cola, said profit rose to $1.06 billion, or 61 cents a share, for the 12-week second quarter ended June 12, from $944 million, or 54 cents per share, a year before.

"Once again, Frito-Lay was a little bit disappointing, as it has been for most of the past year," said David Kolpak, analyst at Victory Capital Management, which owns 5 million PepsiCo shares. "However, Pepsi offset that with phenomenal performance in North American beverages and" its international business.

Revenue increased 8 percent to $7.07 billion from $6.54 billion. The weaker dollar, compared with a year earlier, added 1 percentage point to revenue growth, the company said.

Analysts estimated earnings in the range of 59 cents to 62 cents per share, with an average of 61 cents, according to Reuters Estimates. Analysts, on average, expected revenue of $7.01 billion, according to Reuters Research.

Volume rose only 1.5 percent in the Frito-Lay North America (search) unit.

Snacks volume slowed from the first quarter as weakness in Quaker snacks outweighed improvements in chips and other salty snacks volume. New products like Lay's Stax (search) potato chips helped improve volume.

Kolpak said the low-carb diet trend likely is having a disproportionate effect on the Quaker part of the snacks business.

"The demographic of the people doing the low-carb diets are the same kind of people who were eating low-fat, healthy Quaker snacks a couple of years ago," he said.

International snack volume increased 11 percent, and beverage volume rose 13 percent. Operating profit from the international business rose 23 percent.

Total volume, as measured in total servings, rose 8 percent, with a 10 percent increase in the number of drink servings sold and a 6 percent increase in snack servings.

The company forecast full-year earnings of at least $2.29 per share, with operations generating $4.9 billion in cash. Analysts expected earnings of $2.31 per share for the year.

PepsiCo's shares slipped 71 cents, or 1.3 percent, to $52.70 on the New York Stock Exchange (search) Thursday.

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