PepsiCo (NASDAQ:PEP) executives said third-quarter organic revenue growth accelerated while international operations delivered broad-based gains, but higher input costs, unfavorable mix and weaker-than-expected North American beverage performance prompted the company to lower its earnings outlook for the fourth quarter.
Speaking during the company’s third-quarter earnings question-and-answer session, Chief Financial Officer Steve Schmitt said organic revenue grew 3.1% in the quarter, the company’s fastest organic growth rate since the fourth quarter of 2023. Reported revenue increased more than 5%, while core operating profit rose 3% and earnings per share increased 2%.
International growth drives performance
International operations were a major contributor to the quarter, with organic revenue increasing 8% and operating margin expanding 105 basis points. Chairman and CEO Ramon Laguarta said the results reflected structural improvements in PepsiCo’s competitiveness across markets rather than temporary benefits from weather or events.
“We are becoming much more competitive in both foods and beverages in more markets,” Laguarta said, pointing to performance across Europe, the Middle East, Asia and Latin America.
International operations accounted for 45% of PepsiCo’s year-to-date profit, Laguarta said. The company intends to continue investing to maintain that momentum while also seeking faster and more efficient growth in North America.
Margins pressure fourth-quarter outlook
Schmitt said the reduction in PepsiCo’s fourth-quarter earnings outlook was driven by margin performance rather than sales expectations. Input costs are rising, while product mix has also been a headwind, he said. PepsiCo plans to sustain investments in advertising and marketing, or A&M, despite those pressures.
The company’s commodity hedging programs, which generally extend six to 12 months, had insulated PepsiCo from some inflation earlier in the year, according to Schmitt. However, those hedges are beginning to roll off, and input costs are starting to increase.
Schmitt also said PepsiCo’s North American beverage business received a tariff-related benefit during the third quarter that will not continue into the fourth quarter, creating additional underlying pressure on margins.
Management said it is identifying structural cost-reduction opportunities and plans to use revenue-management tools to partially offset pressure. Schmitt said benefits from those actions should begin to help as the calendar turns, while adding that the company would provide a fuller view of 2027 expectations when it reports fourth-quarter results in February.
North American snacks improve, beverages remain a concern
Laguarta said PepsiCo was not satisfied with its overall performance in the U.S., though he cited progress in the North American snacks business. The company’s snack volume shifted from low-single-digit declines last year to low-single-digit growth this year, aided by pricing resets, innovation and new product platforms, he said.
PepsiCo has also gained volume share in North American foods and snacks for multiple quarters and has begun to convert that progress into value-share gains, according to Laguarta. He said performance had improved less than the company initially anticipated due to consumer conditions and commercial execution, though those areas are improving.
In beverages, PepsiCo said its hydration business has accelerated in both volume and net revenue. The company is continuing to invest in Gatorade and Propel. Laguarta also cited energy brands Alani and Celsius as potential sources of growth once both are fully integrated and executed within the business.
However, he said the company is “not competing well in soft drinks.” PepsiCo plans to increase investment behind brands including Poppi, Pepsi and Mountain Dew while seeking to improve execution with its bottling partners and at retail.
Portfolio, pricing and operating changes
On the food side, Laguarta said PepsiCo is focusing on affordability, price points and formats for consumers facing continued pressure. He said the company does not expect consumers to be in a substantially better position over the next 12 to 18 months.
The company is also investing in what it describes as future-growth platforms, including portion-controlled products and permissible snacks. Laguarta said PepsiCo’s 100- and 120-calorie pack business exceeds $3 billion, while its permissible portfolio also exceeds $3 billion. He named SunChips, Smartfood, Naked, Simply and PopCorners among brands positioned in that segment.
PepsiCo remains open to smaller acquisitions that complement its portfolio, Laguarta said, citing the company’s acquisitions of Siete in foods and Poppi in beverages. He said potential deals would need to offer strategic value and financial returns.
Management also said it is evaluating broader changes to improve North American execution, costs and margins. Laguarta said PepsiCo is considering whether to expand or accelerate refranchising in parts of the country where partners could potentially provide better execution and margins.
The company is continuing to develop its One North America initiative, which integrates aspects of its food and beverage operations. Laguarta said the effort is showing benefits in warehousing and transportation and is now working through delivery details for smaller and larger retail customers. He said the eventual approach would likely vary by geography, with integration in some areas and potential refranchising in others.
“We’re looking at every single element of the strategy,” Laguarta said, adding that PepsiCo is examining costs, partnerships, execution and the allocation of resources with urgency.
About PepsiCo (NASDAQ:PEP)
PepsiCo, Inc (NASDAQ:PEP) is a global food and beverage company that develops, manufactures, markets and distributes a broad portfolio of snacks, drinks and convenient foods. Its beverage brands include Pepsi, Mountain Dew, Gatorade, 7UP in select markets, and bubly, while its food and snack brands include Lay’s, Doritos, Cheetos, Tostitos, Fritos, Quaker and Ruffles.
The company’s operations include beverage production and distribution, snack foods, convenient meals and nutrition-oriented products.
