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Shares of Pepsi trading lower this morning after the company's first quarter earnings came in below expectations and trimmed its outlook citing tariffs and pressure on consumers. Joining us now to break down these results, we've got Nick Modi, RBC Capital Markets managing director, who has a price target of $163 a share and a rating of market perform on the stock. Great to have you here with us, Nick. So, just take us into your analysis that you've got on PepsiCo right now.

Yeah, I mean, look, we were cautious coming into the quarter. We've been cautious on PepsiCo. You know, their North American beverage business has been under pressure for quite a number of years. Uh, they've been losing share pretty consistently with Coca-Cola. But their snack business was really performing quite well and that really started to slow down going back to late last year and kind of rolling into this year. And that's really what's putting a lot of pressure on their margins and their earnings. Um, it's hard to see at this point just given all the consumer uncertainty that that's going to turn anytime soon. I think it's going to take some time and remember, they took a lot of pricing and they also took some chips out of the bag. And I think consumers are noticing and so consumers are making different choices. We're seeing private label across the snack category actually have a lot more traction than what we normally see, uh, even during recessionary or economic kind of constrained environments. So, I think there's some wood to chop here and that's partly why the numbers have to come down.

And given what you're laying out in that kind of backdrop for Pepsi, I know that they're essentially expecting no growth over the course of this year in terms of their latest guidance. Could it potentially go in the other direction? Could you see a decline over the course of this year?

You could. It really does depend. I mean, I think we can all agree that where, you know, visibility is not very high right now for anyone. Uh, and so I think if the consumer does get worse, which by the way, we believe that will be the case, uh, that could definitely drive some downside. Um, and also we have some other geopolitical actions or policy changes that puts even more pressure on their cost structure, like food ingredients, as an example, uh, that could be another driver that could weigh on their results overall.

Do you think a worsening consumer environment is already priced into the shares right now?

Uh, yeah, I mean, we've been quite cautious and remember Pepsi has really been under a lot of pressure on a relative basis. So I think many investors have also been kind of bracing, uh, for the outcome that we had today. Um, so it feels like a lot is priced in, but again, given the lack of clarity and lack of visibility and given the fact that they're losing share in their biggest, most profitable business, you know, we need to get comfort that we're going to hit a stabilization point or an inflection point at some point and it doesn't seem like that's really in the near term right now.

And Nick, I think it's important to note, and I imagine you'd agree with this, that it's not just the tariff and economic uncertainty. Another headwind among many is the GLP-1 usage uptick and the impact that has on things like snacking and soft drinks. To what extent do you think that there are other headwinds for this company that can't be addressed by tariff negotiation?

Yeah, I think the GLP-1 is fair. I mean, we believe what's going on with PepsiCo is much more cyclical or economic related than GLP-1. Uh, we've done a lot of work in this area. I know that might be a contrarian viewpoint, but that's kind of what our analysis would point to. Uh, then we have potential implications of not being able to use SNAP, or formerly known as food stamps, to buy carbonated soft drinks. Um, so that could potentially be an issue. There's a lot of states that are coming up with state level regulations that are calling for that. Um, so there, yeah, there's a, you know, you have the food ingredient dynamic and what's going on with RFK Jr. in terms of taking out food dyes and potentially other changes down the road. So there's a lot of wood to chop and earlier this week we put out a report basically urging and encouraging all of our companies to cut their earnings forecast significantly because I think they need that flex on their earnings income statement to invest to deal with a lot of these changes, but also provide benchmarks and targets that investors can have high conviction in. That's the beauty of the consumer staples industry is that when things are tough, investors really like to buy these stocks, but we're just not seeing it happen to that degree this cycle because there's so much earnings risk.

And Nick, if things are tough for consumers, what we've typically seen in the past is that they will flock to where they can get the best discounts and deals, and typically that has meant buying in bulk, and we see surges in places like Costco or Walmart's Sam's Club or BJ's wholesale. Are those bulk buyers enough in the interim period to at least buoy or save to some extent Pepsi and their competitors' financial performance?

Yeah, I don't think it's enough and here's really the way you have to think about it. Buying in bulk is value shopping for higher income consumers, right? Because they're able to actually outlay the capital and they get a lower price per ounce. But if you're a lower or middle-income consumer, you may not have all that capital to buy in bulk, and you might not even have the space because you're living probably in a smaller living area, right? And so, I think really what's happening right now is that this is a middle lower income issue that is starting to have some impact on higher income consumers because the stock market is under pressure. And so, the combination of the two is obviously why we've been so cautious and think things will get worse before they get better.