Advertising blitz, sugar-free Gatorade drive PepsiCo profit beat

(Reuters) - PepsiCo Inc PEP.O benefited from an ad blitz in the third quarter, beating profit and sales estimates, as more health-conscious consumers bought its low-calorie beverages and snacks in North America.

FILE PHOTO: Bottles of Pepsi are pictured at a grocery store in Pasadena, California, U.S., July 11, 2017. REUTERS/Mario Anzuoni/File Photo

Shares rose as much as 4% to $139.27 on Thursday, standing out in a weak broader market and boosting the S&P consumer staples sector.

Since taking the helm last October, Chief Executive Officer Ramon Laguarta has carved out a multi-billion dollar strategy, which includes partnering with celebrities such as Chrissy Teigen and ramping up manufacturing capacity for smaller cans, to boost demand for out-of-favor sugary sodas.

The company has splurged on new ads for its trademark Pepsi colas, as well as Mountain Dew and Gatorade beverages, rounding off with a campaign centering around the National Football League’s 100th anniversary. Advertising and marketing expenditure has jumped 12% so far this year, the company said.

Gatorade sales have been revived by a zero-sugar version of the sports drink, and PepsiCo said retail sales of the variant have surpassed half a billion dollars since the launch in May 2018.

“(Gatorade Zero) is capturing consumers that I think were very heavy users of Gatorade and abandoned the brand because of the calories,” Laguarta said on a conference call with analysts.

Overall beverage sales in North America rose 3.4% in the third quarter to $5.64 billion, also supported by its Bubly sparkling water brand.

PepsiCo has launched Bubly in fruity flavors, and Chief Financial Officer Hugh Johnston told Reuters that he expects it to become the company’s next billion-dollar brand, with sales rising “dramatically” after a Super Bowl ad earlier this year.

The company’s major snack brands, Doritos and Cheetos, also got a lift from the marketing push, at a time when calorie-counting Americans increasingly shift toward healthier options.

Johnston attributed the rise to on-the-go lifestyles.

“With busier lifestyles (there) comes a desire to eat more conveniently, which is a strong tailwind for our business”.

PepsiCo said it expects to meet or exceed its fiscal 2019 organic revenue growth target of 4%. However, the heavy spending on advertising and manufacturing came at a cost.

The company’s net income attributable fell 16% to $2.10 billion and it left its full-year core earnings per share forecast unchanged.

The profit forecast suggested that the cost of achieving revenue growth was rising, according to Wells Fargo analysts.

Net revenue rose 4.3% to $17.19 billion, beating analysts’ estimates of $16.93 billion, according to IBES data from Refinitiv.

Excluding one-time items, the company earned $1.56 per share, beating the average estimate of $1.50.

Reporting by Uday Sampath in Bengaluru; Editing by Sriraj Kalluvila