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What Drove PepsiCo’s Margins in the First Quarter?


Apr. 22 2019, Updated 8:25 a.m. ET

Margin improved in Q1

PepsiCo’s (PEP) gross margin expanded 87 basis points on a year-over-year basis to about 55.9% in the first quarter of 2019, which ended on March 23. On an adjusted basis, PepsiCo’s gross margin expanded 67 basis points.

PepsiCo’s operating margin increased 120 basis points on a reported basis to about 15.6% in the first quarter. PepsiCo’s margins improved despite higher commodity costs and a double-digit increase in advertising and marketing costs. Productivity savings and a favorable mark-to-market net impact on commodity derivatives drove the margin improvement in the first quarter. The expansion in PepsiCo’s adjusted operating margin was 78 basis points.

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Margin outlook

PepsiCo expects to see higher commodity inflation in the remainder of the year. Also, the company expects the accelerated pace of planned reinvestment in its strategic initiatives to put pressure on its operating margin in 2019. However, the company’s productivity efforts are expected to help in improving margins.

PepsiCo aims to generate $1 billion in annualized savings through 2023. The company intends to leverage new technology and business models to ensure further simplification and automation of processes. PepsiCo will also continue to re-engineer its go-to-market and information systems, simplify its organization structure, and optimize its manufacturing and supply chain footprint. PepsiCo expects to incur pre-tax restructuring charges of $2.5 billion through 2023.

Rival Coca-Cola (KO) has also been implementing several initiatives to deliver costs savings of $3.8 billion by 2019. Coca-Cola’s productivity program includes supply chain optimization and the standardization of data and information technology systems.


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