PepsiCo's advertising blitz drives profit beat, solid forecast

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(Reuters) – PepsiCo Inc (O:) beat third-quarter profit estimates and forecast upbeat revenue growth for 2019 on Thursday, as aggressive advertising and a focus on healthier products spurred demand for its beverages and snacks in North America.

Shares rose 2.2% to $136.83 in premarket trading, as the company said it expects to meet or exceed its fiscal 2019 organic revenue growth target of 4%.

Since taking the helm last October, Chief Executive Officer Ramon Laguarta has carved out a multi-billion dollar strategy that includes partnering with celebrities such as Chrissy Teigen and ramping up manufacturing capacity for smaller cans to boost demand for out-of-favor sugary sodas.

The company has splurged on new ads for its trademark Pepsi colas, as well as Mountain Dew and Gatorade beverages, rounding off with a campaign centering around the National Football League’s 100th anniversary.

Advertising and marketing expenditure has increased 12% so far this year, the company said.

Gatorade sales have benefited from new low sugar and organic options, and the company said a sugar-less version of the sports drink surpassed half a billion dollars in retail sales since its launch in May last year.

Overall beverage sales in North America rose 3.4% in the third quarter to $5.64 billion, also supported by new flavors of its bubly sparkling water brand.

PepsiCo Chief Financial Hugh Johnston told Reuters that he expects bubly to become its next billion-dollar brand, with sales rising “dramatically” after a Super Bowl ad earlier this year.

The company’s major snack brands, Doritos and Cheetos, also got a boost from the marketing push, even as calorie-counting Americans increasingly shift toward healthier options.

On-the-go lifestyles are helping snack sales, Johnston said.

“With busier lifestyles (there) comes a desire to eat more conveniently, which is a strong tailwind for our business”.

Net revenue rose 4.3% to $17.19 billion in the three months ended Sept. 7, beating analysts’ estimates of $16.93 billion, according to IBES data from Refinitiv.

However, the higher investments have been a drag on profit.

The company left its full-year core earnings per share forecast unchanged, which Wells Fargo (NYSE:) analyst Bonnie Herzog said was a sign that the cost of achieving top line growth was rising.

PepsiCo’s attributable net income fell to $2.10 billion, or $1.49 per share in the quarter, from $2.50 billion, or $1.75 per share, a year earlier.

Excluding one-time items, the company earned $1.56 per share, beating the average estimate of $1.50.

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