shares had their biggest percentage increase in nearly a decade Tuesday on hopes that the company is arresting the decline of its core, domestic beverages business. Investors are celebrating prematurely.
The company reported revenue that was in line with estimates and adjusted earnings per share that were ahead of expectations for the quarter ended June 16. Pepsi’s snack business continues to perform well, as American consumers these days are less worried about the health impact of salt consumption but are more worried than ever about sugar.
Comparable sales for the Frito-Lay North America segment rose 4% from a year earlier, while the North America Beverages segment saw a 1% decline.
That decline was milder than previous quarters, cheering investors. The company has increased marketing spending on its core soda products, which appears to have helped stabilize sales. But advertising blitzes can only do so much amid generational shifts in consumer preferences and health consciousness. The long-term outlook for sugary beverage sales still looks bad.
Pepsi of course knows this, but its efforts to respond haven’t been that impressive. It has introduced a new line of zero-calorie flavored soda water called Bubly, which it says is performing extremely well. This, however, is a product segment where consumers aren’t exactly starved for choice, so it is uncertain how much market share Pepsi can grab.
On a conference call, Chief Executive Indra Nooyi also called out a new zero-sugar Gatorade line, “for the light exerciser who didn’t want the carbohydrates that real athletes needed.”
If anything, though, this just highlights how much Pepsi has dragged its feet.
Powerade and Vitaminwater lines have both had zero sugar lines for many years.
In April, Ms. Nooyi said Pepsi was considering spinning off or selling its bottling operations. Rival Coca-Cola is just wrapping up a yearslong process of moving these operations to independent bottlers. The merits of such a move are debatable. Coca-Cola has shifted back and forth over the years. Even so, analysts were generally positive on the possibility as it would help cut costs amid a surge in shipping rates. Of course this also means the businesses might fetch a less attractive price if sold.
On Tuesday’s conference call, however, Ms. Nooyi appeared to tone down expectations for any major moves.
“There’s always going to be short-term reservations when competitors go through major changes in their business models,” she said. “Our challenge is to maintain a very steady hand.”
Pepsi shares are currently trading at around 19 times forward earnings, compared with a five-year average of 20.4 times, according to FactSet. Until there is a more convincing turnaround in its single largest business, that discount looks justified. Shares may have popped, but don’t expect them keep sparkling.
Write to Aaron Back at email@example.com