Can PepsiCo's 4Q15 Results Impress despite Currency Headwinds?
Margin expansion
PepsiCo’s (PEP) gross margin has expanded in each of the first three quarters of fiscal 2015. In fiscal 3Q15 ended September 5, 2015, PepsiCo’s gross margin increased to 54.7% from 53.6% in 3Q14. The growth in PepsiCo’s 3Q15 gross margin was driven by the company’s revenue management strategies and productivity measures.
Operating margin in 3Q15
Unlike PepsiCo’s gross margin, the company’s operating margin declined to 8.7% in 3Q15 from 16.5% in 3Q14. This decline was primarily the result of a $1.4 billion impairment charge related to the company’s Venezuelan operations. The iShares Global Consumer Staples ETF (KXI) has 4.3% exposure to PepsiCo.
The 3Q15 operating margin of rivals Coca-Cola (KO), Dr Pepper Snapple (DPS), Monster Beverage (MNST), and Cott Corporation (COT) came in at 20.8%, 20.7%, 38.5%, and 3.8%, respectively, in 3Q15.
Productivity measures
Despite the impact of currency headwinds, PepsiCo’s gross margin in 4Q15 might continue to expand due to the company’s productivity initiatives. PepsiCo generated $3 billion in productivity savings from 2012–2014. The company’s ongoing five-year productivity program commenced in 2015 and aims to deliver $5 billion in productivity savings.
The company’s technology investments and a leaner operating model have helped in improving its efficiency by allowing the company to leverage its global scale to a much greater extent. The company has increased the use of automation in its operations. For instance, PepsiCo has installed packaging automation across approximately one-third of its snack plants worldwide. This has enabled a reduction of packaging label costs in these facilities by at least 50%.
PepsiCo has also been optimizing its global manufacturing footprint. Since 2010, PepsiCo has brought down the number of company-owned beverage plants in North America by 23% and increased its capacity utilization by 20%. PepsiCo’s other productivity initiatives include the restructuring of its go-to-market systems, leveraging shared services, and zero-based budgeting.
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