PepsiCo, Inc. (PEP) shares declined in pre-market trading on concerns about foreign exchange pressure and the company's revised earnings per share guidance.
The stock price dropped 1.9% to 108.60 per share as of 9:51 a.m. in New York after the company revised guidance to $5.65 from $5.70 per share.
The company reported 2 percentage point negative impact on net revenue growth in the third quarter, which grew 1.5%.
PepsiCo has also revised expectation of an approximate 1 percentage point headwind from foreign exchange as the dollar strengthens.
These adjustments along with the leadership change led the shares to drop in early trading on Tuesday. Today makes the last day of Indra Nooyi's 12-year career, with Ramon Laguarta taking over as CEO on Wednesday.
"The company lowered EPS guidance by $0.05 driven by FX (constant currency EPS growth sill +9% YoY), with the lower tax rate and higher organic sales offset by a combination of cost inflation an elective reinvestment," said Steve Powers, research analyst at Deutsche Bank in a research note on Tuesday. "Given the middling results today, the possibility of an earnings rebase for 2019, and a new, relatively unknown CEO taking the reins tomorrow, we expect the stock to modestly underperform today."
Earnings per share still topped analyst estimates at $1.59 with $1.57 expected and revenue topped estimate at $16.5 billion against a $16.36 billion expectation, per Thomson Reuters estimates.
One issue highlighted in the earnings that could explain the share slide this morning were the contracting margins for the company.
Reported operating margin contracted 75 basis points and core operating margin contracted 25 basis points, according to the company's 8-K filing.
The company cited costs in transport, aluminum, and increased advertising spend for this impact.
"Number one was cost pressure, transport costs add little more up," Pepsi CFO Hugh Johnston explained. "Number two, it was the increased in advertising and marketing spend across a number of our businesses."
He said the company has recently priced this is and will look to overcome these concerns as new CEO Ramon Laguarta takes the helm.
"Regarding the input cost inflation, whether it's transport or whether it's aluminum, our history is always been to price through inflation in our developed markets," he explained. "I think you will see the profit picture improve in Q4 as a result of that pricing."
Nooyi began her last quarterly announcement by touting the international business, a key part of the business strategy that she will leave to incoming CEO Ramon Laguarta as she departs her Purchase, New York headquarters on Wednesday.
"We are pleased with our results for the third quarter," she said in a statement. "We continued to see very strong operating performance from our international divisions, propelled by developing and emerging markets."
The company reported strong growth in particular from its Europe and Sub-Saharan Africa unit, which reported 2% revenue growth. Meanwhile, on operating profit, the company reported that the Asia, Middle East, and North Africa segment grew 32%, marking profitable inroads to emerging markets.
Of course, as a new CEO takes over, there will also remain concerns about execution in a challenged space such as international beverages, given the headwinds present.
Snacks Soar in America
One of the most positive notes, which Nooyi has been instrumental in building, was the snack unit's momentum.
Frito Lay North America was also touted for strong revenue growth, reflecting the company's increased focus on snacks under Nooyi's leadership.
As of the last available 10-K filing, Frito-Lay made up approximately 25% of the company's net revenue.
Quaker Foods North America also posted revenue growth for the quarter, marking its fifth consecutive quarter to do so.
"We are pleased to report that the third quarter, PepsiCo was the largest contributor to food and beverage growth at retail in the United States," Nooyi said, concluding the discussion on the sector.
This segment in part led to her raising estimates for Laguarta's first quarter to come.
"On the strength of our year-to-date results, we have revised upward our full-year organic revenue growth target," she said, expecting the positive results to continue as she passes the torch.
For the time being, the market seems apprehensive about this passing of the torch, as Nooyi's vision has been integral to Pepsi's success.