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Will PepsiCo’s Fiscal 1Q16 Margins Benefit from Higher Productivity Measures?

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PepsiCo’s productivity plan

PepsiCo’s (PEP) performance in recent quarters has been impacted by currency headwinds and softness in beverage volumes. The company is trying to offset the impact of these unfavorable factors by enhancing its margins. In fiscal 2016, PepsiCo expects to deliver productivity savings of ~$1 billion. The company’s planned productivity savings for fiscal 2016 are in line with its objective of generating $5 billion from productivity in the 2015–2019 period.

Will PepsiCo's Fiscal 1Q16 Margins Benefit from Higher Productivity Measures?

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Previous quarter’s margins

In 4Q15, PepsiCo’s gross margin expanded to 54.9% from 53.1% in 4Q14. The company’s operating margin increased to 12.1% in 4Q15—up from 10.2% in the comparable quarter of the previous fiscal year. This margin expansion in 4Q15 was a result of the company’s productivity initiatives and revenue management strategies.

Overall, PepsiCo’s fiscal 2015 gross margin increased to 55%—up from 53.7% in the previous fiscal year. However, the company’s operating margin declined to 13.2% in fiscal 2015, which was down from 14.4% in fiscal 2014, mainly due to the impairment charges related to the company’s Venezuela operations.

The fiscal 2015 operating margins of peers Coca-Cola (KO), Dr Pepper Snapple (DPS), and Monster Beverage (MNST) came in at 19.7%, 20.7%, and 32.8%, respectively. The iShares Russell Top 200 Growth ETF (IWY) has a 2% exposure to PepsiCo.

Productivity initiatives

PepsiCo plans to enhance its margins through a continued reductions in corporate expenses. The company is also accelerating investments in manufacturing automation and is further optimizing its global manufacturing footprint. Additionally, the company is re-engineering its go-to-market systems in developed markets, expanding shared services, and simplifying its organization structures to drive efficiency.

PepsiCo’s margins in 1Q16 are likely to benefit from such productivity initiatives. However, currency headwinds might continue to be a drag on the company’s profitability.

Now let’s discuss the actual earnings expectations for PepsiCo in 1Q16.

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