PepsiCo says investments to drive sales will dent profit this year

(Reuters) - PepsiCo Inc said on Friday increased investments in advertising and products aimed at boosting sales growth would lead to a fall in profit this year.

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

In his first major strategic move after taking over as chief executive officer, Ramon Laguarta unveiled plans to cut jobs and restructure plants to save $1 billion annually through 2023 and fund its investments in a bid to claw back market share from larger rival Coca Cola.

Shares of PepsiCo were up 2 percent in late morning trading as the company also reported better than expected core revenue growth, driven by higher demand for its Frito-Lay snacks and its beverages in North America.

Pepsi and Coca-Cola are spending heavily to market low-sugar colas and flavored waters to keep up with changing consumer preferences toward healthier beverages.

Although increased advertising is helping sales, it is pressuring margins that are already squeezed by rising commodity and freight costs.

“While organic sales growth guidance suggests topline strength should continue, earnings per share suggests the cost of achieving that growth is increasing,” Wells Fargo analyst Bonnie Herzog said.

The company said it expects 2019 adjusted profit per share to drop 3 percent to $5.50, while analysts on average had expected a 3.5 percent rise to $5.86 per share, according to IBES data from Refinitiv.

The forecast also takes into account a higher tax bill and a 2 percentage point hit from a stronger dollar.

Coca-Cola also warned on Thursday that its earnings per share could fall in 2019, citing a stronger dollar. The forecast pushed its shares down nearly 9 percent.

Sales in PepsiCo’s North America beverage unit, the company’s largest revenue contributor, rose 1 percent in the fourth quarter, benefiting from demand for Pepsi sodas, LIFEWTR and bubbly sparkling water and Gatorade Zero.

The investments in advertising and innovation is driving strong growth for core products, Chief Financial Officer Hugh Johnston told Reuters.

“(This) has caused us to want to invest more money back into the businesses in 2019 and that is why our guidance has landed where it has.”

Stripping off the forex impact and acquisition costs, PepsiCo forecast a 4 percent growth in operating revenue this year, higher than the six-year average growth rate of 3.8 percent.

Revenue and profit were in line with expectations for the quarter ended Dec. 29. The company also announced a 3 percent hike in annual dividend to $3.82 per share.

Reporting by Aishwarya Venugopal in Bengaluru; Editing by Bernard Orr and Saumyadeb Chakrabarty