Curtain Is Lifted During Pepsi Earnings Call

Pepsi-logoEarnings season for most companies is a time to show off or to be shamed — beating analyst expectations or missing the mark.
But every once in a while, you get to see a different side of a company than you are used to. Last Thursday, PepsiCo (NYSE:PEP) showed interested investors a little bit of what’s behind the curtain.
Many investors are almost single-mindedly interested in growth. If a stock isn’t growing, it’s dying – or so many believe. If that’s the case, how in the world do companies already bigger than anyone could have ever imagined keep growing — especially ones that have been around for decades and have already penetrated just about every market in the world?
The answer is a lot more subtle than you get from the smaller players or newer companies. For multinational giants, growth comes from stealing market share, productivity and most importantly, innovation. Pepsi, likely without even realizing it, gave us a road map on its earnings call as to how this is done.
The company, as you know, is a brand monster. It hoards brand names like Lays, Quaker Oats, Gatorade and of course its key brand name, Pepsi. The problem, as you can imagine, is that most of these brands have already been selling worldwide for decades. Worse, they aren’t exactly considered healthy on today’s health-conscious planet.
That’s where the company’s behind-the-scenes work begins.

The Curtain Is Drawn

In a new move, instead of outlining how each of its geographical segments’ numbers break down – as most companies do – Pepsi is doing something different with its quarterly calls.
On Thursday’s second-quarter Pepsi earnings call, its management team decided to tackle the topic of innovation. You might not think of a company like Pepsi when you hear that term. But you should.
While it’s not designing world-changing technologies in state-of-the-art laboratories, Pepsi’s innovation pipeline is still the core to its future growth. During the call, the company outlined its seven-point restructuring program.
Now, it isn’t a new program. In fact, most of these steps have already been taken. And they have clearly been effective, as I’ll get to when I discuss the company’s quarterly numbers.
Here are the seven changes Pepsi has made on innovations:

  1. Restructure Category Groups — Instead of single markets making decisions on their own, each large region (i.e., North America, Europe, Latin America, etc.) has a centralized approach to development and product launches.
  2. “Proprietary Demand Moments Framework” — The company now spends a great deal of its efforts on shopping and consumer trends. From here, it begins to build in what its customers want to buy to its new product ideas.
  3. “Stage-Gate Process” — This managerial jargon simply means that Pepsi is aggressively planning out multi-year development projects, rather than haphazardly funding and moving each one through each stage in the process.
  4. “Rapid Lift and Shift” — This is the company’s ability, and now implementation, of taking what works in one market and replicating it in another.
  5. Increase Total Investment Dollars — This is a straightforward change. The company wanted to gain market share and realize growth through innovation, so it is spending more on this process. Forty percent more between 2011 and 2014, to be specific.
  6. Frontload Design — Rather than developing a product or flavor first, before its packaging and design is discussed, Pepsi now brings in its design team much earlier in the process. This helps the company fix kinks in design and wasted money after the development nears its end.
  7. Reverse-Engineer Emerging Market Process — Similar to No. 4, this step takes what has worked already and recreates it elsewhere. But instead of simply applying it from one market to another, it’s integrated from one product to another, even in the same country. But as the title suggests, this happens mainly in emerging markets.

Now, none of these ideas are revolutionary. But you can see how each one can improve the company’s ability to grow its brands. If all of these ideas can combine into just a percentage point of increased margin or revenue growth each year, it will turn Pepsi into a grower. And as the other half of its Thursday earnings announcement showed, that’s exactly what is happening.

Top and Bottom Line Growth

Pepsi grew its top line by 5% during the second. And on a constant-currency basis – excluding messy currency exchange fluctuations – the company made 11% more in earnings per share year-over-year.
More importantly, it also upped its guidance for its full-year numbers. Pepsi now expects it will grow its bottom line a full 8%. That’s a large growth rate for such a huge multinational corporation like Pepsi – especially if you think of it as an old, bad-for-you, snack and soda company.
Clearly, it’s the little things that keep these enormous companies growing. So, while it might be more exciting to read about a startup tech company’s new gadget, it might just be more profitable to check out the subtle ways large companies continue growing.
As for right now, Pepsi is not going to be a superstar, high-growth, home run company for your portfolio.
But with this growth, its comparatively cheaper stock price – 12.9% cheaper than Coca-Cola (NYSE:KO) on a price-to-earnings basis – and its dividend (43 consecutive years of dividend increases), Pepsi is one stock you should consider owning for the long haul.

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