Why PepsiCo’s 3Q Gross Margin Might Be under Pressure
Likely contraction in gross margin
PepsiCo (PEP) is scheduled to report its fiscal 3Q17 results on October 4. The company’s gross margin is expected to be under pressure in the third quarter due to continued raw material inflation. The higher raw material cost is expected to result from an increase in the company’s basket of commodities and the adverse impact of foreign currency fluctuations.
In fiscal 2Q17, which ended on June 17, 2017, PepsiCo’s gross margin contracted 55 basis points on a year-over-year basis to 55.1%. This contraction was a result of higher commodity prices.
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Operating margin in the previous quarter
PepsiCo’s operating margin contracted 20 basis points to 19.0% in fiscal 2Q17. The company’s operating margin was adversely impacted by a rise in certain operating costs, higher commodity costs, and currency headwinds. The company’s adjusted operating margin expanded 50 basis points in fiscal 2Q17. The gains from the sale of the company’s minority interest in Britvic favorably impacted the fiscal 2Q17 operating margin by 60 basis points.
The company’s operating margin might continue to be under pressure due to higher costs. However, the company’s productivity initiatives are expected to benefit its operating margin. To improve its productivity and enhance its margins, PepsiCo is taking several measures like accelerating its investment in manufacturing automation, optimizing its global manufacturing network, and re-engineering its go-to-market systems in developed markets. The company is also expanding shared services to further reduce costs and is simplifying its organization structures.
Rival Coca-Cola (KO) has been refranchising its bottling operations to reduce its exposure to the low-margin, capital-intensive bottling business and focus on its concentrates business.
We’ll discuss what analysts expect from PepsiCo’s fiscal 3Q17 earnings in the next part of this series.