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Will PepsiCo’s Margins Continue to Improve in 2Q15?

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Dec. 4 2020, Updated 10:53 a.m. ET

Improvement in margins

PepsiCo’s (PEP) margins have improved with the implementation of its five-year productivity program. In the first quarter of 2015, PepsiCo’s gross margin improved to 55.5% from 54.5% in the corresponding quarter of the previous year. Its operating margin also improved to 14.7% in 1Q15 from 14.3% on a year-over-year basis.

PepsiCo’s margins have improved in a volatile macro environment helped by tight cost controls and higher net pricing. The company also made adjustments to raw materials sourcing to mitigate the impact of currency headwinds.

Margins in fiscal 2015 are expected to be impacted by low- to mid-single-digit commodity inflation, including the impact of currency translation.

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Productivity measures

PepsiCo achieved $3 billion of productivity savings between 2012 and 2014. The company then extended its productivity program with the aim to generate $1 billion in annual productivity savings from 2015 through 2019.

In the first quarter of fiscal 2015, PepsiCo recorded pre-tax restructuring charges of $30 million related to the 2014 productivity plan. PepsiCo’s 2014 productivity plan involved optimization of the company’s global manufacturing facilities, reengineering of its go-to-market systems in developed markets, expansion of shared services, and implementation of a leaner organizational structure.

Margins of peers

Coca-Cola’s (KO) operating margin fell to 21.4% in 1Q15 from 22.5% in the comparable quarter of the previous year. The company’s international segments were impacted by the strengthening of the US dollar against a basket of major foreign currencies.

Dr Pepper Snapple’s (DPS) operating margin remained flat at 18.6% in 1Q15. The company continues to implement several initiatives under its Rapid Continuous Improvement productivity program.

Coca-Cola, PepsiCo, and Dr Pepper Snapple together account for 14.5% of the portfolio holdings of the Consumer Staples Select Sector SPDR Fund (XLP) and 2.9% of the iShares Russell 1000 Growth ETF (IWF).

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