Yahoo Finance What Caused the Decline in PepsiCo’s 1Q16 Operating Margin?
PepsiCo Delivers Mixed 1Q16 Results but Reaffirms 2016 Outlook
Gross margin in 1Q16
PepsiCo (PEP) has been focusing on improving its profitability by implementing several productivity initiatives including manufacturing automation, optimization of global manufacturing footprint, expansion of shared services, and implementation of simplified organization structures to drive efficiency.
In 1Q16, PepsiCo’s gross margin expanded by 160 basis points to 56.6% due to the company’s revenue management strategies and productivity initiatives. However, the company’s operating margin declined in the quarter.
Operating margin down in 1Q16
PepsiCo’s operating margin in 1Q16 declined by 105 basis points to 13.6%. The contraction in PepsiCo’s operating margin was a result of a $373 million impairment charge related to the company’s 5% indirect equity interest in Tingyi-Asahi Beverages Holding. Excluding the impact of exceptional items, the company’s core operating margin increased by 165 basis points.
PepsiCo’s operating margin contracted in fiscal 2015 to 13.2% from 14.4% in fiscal 2014. The company’s operating margin lagged its peer group in fiscal 2015. Coca-Cola (KO), Dr Pepper Snapple (DPS), and Monster Beverage (MNST) reported operating margins of 19.7%, 20.7%, and 32.8%, respectively, in fiscal 2015.
PepsiCo and its three peers mentioned above account for 10.5% of the iShares Global Consumer Staples ETF (KXI) and 16.4% of the Consumer Staples Select Sector SPDR Fund (XLP).
Productivity initiatives
Since 2012, PepsiCo has generated $1 billion of annual productivity savings. The company aims to deliver productivity savings of $1 billion in fiscal 2016 also. In the 1Q16 conference call, PepsiCo disclosed that it has fully implemented its zero-based Smart Spending program across the organization. This program has enabled the company to rightsize its operating expenses in targeted areas like travel and facilities.
Margins in the remaining year
In its 1Q16 conference call, Hugh Johnston, PepsiCo’s chief financial officer, stated that the company expects less margin improvement in 2Q16 and 3Q16 and stronger margin improvement in 4Q16. The company expects commodities to be a bit inflationary in the rest of the year, thus putting pressure on margins. Also, the company’s corporate expenses are not expected to be down at the same rate as they were in 1Q16.
We’ll look at PepsiCo’s stock price movement and analysts’ recommendations in the concluding part of this series.
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