Strong overseas markets cannot conceal the weak demand in North America. PepsiCo, Inc.'s organic sales and profits in Q2 were lower than expected.

Global food and beverage giant PepsiCo, Inc. (PEP.US) announced its second-quarter performance for the fiscal year 2026 on Thursday, with net revenue growing by 6.4% year-on-year to $24.18 billion, exceeding market expectations of $23.95 billion. However, weak performance in the North American market offset strong international demand, with core earnings per share at $2.20, lower than the analyst consensus of $2.21. Performance Overview: Revenue exceeds expectations, but profits fall slightly short The financial report shows that PepsiCo, Inc.'s net profit attributable to the company in the second quarter was $2.98 billion, or $2.18 per share, a significant increase from $1.26 billion ($0.92 per share) in the same period last year. Excluding restructuring and impairment costs, core earnings per share were $2.20. Net sales increased by 6.4% to $24.18 billion. Organic revenue (excluding acquisitions, divestitures, and currency effects) grew by 2.4%, lower than analyst expectations. Currency contributed by 2.2 percentage points, while net contributions from acquisitions and divestitures were 1.8 percentage points. From an operational perspective, global convenience food organic sales grew by 3%, while global beverage organic sales increased by 2%. Core operating profit increased by 4% to $4.07 billion, but core operating margin contracted by 40 basis points to 16.8%. North American Challenges: Consumers holding back due to high gasoline prices PepsiCo, Inc.'s performance in North America was the biggest drag this quarter. CEO Ramon Laguarta admitted in the financial report statement, "Rising inflationary pressures have tightened consumer budgets, resulting in a slowdown in the performance of the American food and beverage category, suppressing performance this quarter." Data shows that North American convenience food business saw flat sales volumes this quarter, with revenue declining by 2%. Sales volumes in the North American beverage segment decreased by 4%. Despite lowering prices by up to 15% for brands such as Lay's, Doritos, and Cheetos in February to win back consumers, the effect has not been fully realized. The direct driver of softening North American consumption is gasoline prices. This quarter, the US-Iran conflict led to severe fluctuations in global oil prices, with the national average gasoline price in the US reaching a four-year high of $4.56 per gallon in late May. High gasoline prices directly squeezed consumers' disposable income, leading to tighter spending on daily food and beverage items. RBC Capital Markets had previously warned that progress in North American food business could stall due to rising gasoline prices. Evercore ISI analysts also preemptively cautioned, predicting organic sales growth of only 2.3%, lower than the market's expectation of 2.8%. International Business: Overseas markets act as a "ballast" The weakness in North American business was offset by strong growth in international markets. PepsiCo, Inc.'s international segments all reported robust net revenue growth. Asia Pacific food, international beverage franchising, and Europe, Middle East, and Africa regions all reported organic sales increases. International business organic revenue grew by 7%. Laguarta emphasized in the financial report, "Year-to-date, PepsiCo, Inc.'s global organic sales growth has reached its highest level since 2022, thanks to the strong performance of our international business and the continuous optimization of our product portfolio, including portion control series, diversified ingredients, functional beverages, energy drinks, and zero-sugar beverages." PepsiCo, Inc. has been continuously promoting the transformation of its product portfolio towards a healthier, functional direction in recent years, launching more high-protein, high-fiber products to cater to consumers' demand for healthy snacks. Margin Pressure: Rising costs and price wars' squeeze This quarter, PepsiCo, Inc.'s profit margins faced a double squeeze. On one hand, semiconductor and other component costs have risen across the board, pushing up production costs. The company has been facing cost inflation pressure consistently over the past few quarters. On the other hand, in order to win back North American consumers, PepsiCo, Inc. implemented price cuts of up to 15% for brands like Doritos and Lay's in February, directly reducing revenue from the North American business. The combination of these factors led to a contraction in core operating profit margin from 17.2% in the same period last year to 16.8%, a decrease of 40 basis points. Vital Knowledge commented after the financial report release that this was an "overall as expected, slightly disappointing report, with a negative focus on margin decline and weak organic revenue performance in North America (both food and beverages)." Full-Year Outlook: Maintaining guidance, North American recovery will take "longer time" Despite the underperformance in the second quarter in North America, PepsiCo, Inc. reiterated its full-year performance guidance for fiscal year 2026. The company expects organic revenue growth of 2% to 4%; core constant currency earnings per share growth of 4% to 6%. Including foreign exchange gains, the midpoint of the guidance implies a core earnings per share growth rate of 5% to 7%. New CFO Steve Schmidt acknowledged in the financial report statement, "Our North American business was softer in the second quarter than we expected, and we now anticipate that the improvement in performance for the remainder of the year will be more gradual." PepsiCo, Inc. expects North American sales volumes to eventually recover, but this will take time. The focus for investors will be on whether North American consumption trends can gradually improve in the second half of the year. Valuation Game amidst Transformation Pains PepsiCo, Inc. is at a crucial strategic crossroads. The soft performance in the North American market is a short-term headwind, but the strong growth in international business, along with the continuous optimization of the product portfolio, provides long-term support for growth. The company has already taken proactive measures on the cost side: PepsiCo, Inc. has initiated layoffs, closed three factories, merged production lines, reduced nearly 20% of SKU in the US, and improved efficiency through supply chain optimization. The company expects capital spending to be below 5% of net sales in 2026 and reiterated a $10 billion share buyback plan. PepsiCo, Inc.'s history of increasing dividends for 54 consecutive years and a dividend yield of approximately 4% provide a solid valuation base. JPMorgan pointed out before the financial report that PepsiCo, Inc. "rarely lags behind profit expectations", and investors already had low expectations for the second quarter. However, Vital Knowledge's comment highlighted the core contradiction "leaning towards the negative details." Before North American consumption trends clearly improve, PepsiCo, Inc.'s path to valuation recovery may not be smooth. For this food and beverage giant with iconic brands like Doritos, Lay's, and Gatorade, the task for the second half of the year is not only to continue its strong performance in international markets but also to reignite consumer enthusiasm in the domestic market. Ahead of the financial report release, several Wall Street institutions had significantly lowered PepsiCo, Inc.'s target price, reflective of cautious expectations for North American consumption prospects. On July 2, UBS Group AG reduced its target price from $186 to $172, maintaining a "buy" rating. On the same day, JPMorgan lowered its target price from $178 to $170, maintaining an "overweight" rating. Barclays also significantly reduced its target price from $158 to $144. Bank of America Corp lowered its target price to $164 on June 25, with a "neutral" rating. According to TipRanks data from 18 analysts surveyed, PepsiCo, Inc. has a consensus rating of "cautious hold", with an average target price of $164.90. Evercore maintains a "market perform" rating with a target price of $170. It is worth noting that PepsiCo, Inc.'s stock price has only risen by about 1% year-to-date, significantly lagging behind Coca-Cola Company's 21.6% increase and approximately 9% increase in the S&P 500 index.