PepsiCo reported stronger-than-expected revenue in its second quarter despite significant weakness in North America, where the beverage and snack giant said consumers tightened their budgets due to mounting economic pressures. The company posted net revenue of $24.18 billion for the April-June period, up 6.4% year-over-year and exceeding Wall Street’s forecast of $23.95 billion.
Yet the company’s earnings performance told a different story. Adjusted earnings per share came in at $2.20, missing the consensus estimate of $2.21. The miss highlighted the severe challenges facing PepsiCo’s crucial North American business, where volume growth essentially stalled despite aggressive efforts to revitalize consumer demand through price cuts and product innovation.
“Results were tempered in the quarter as U.S. food and beverage category performance moderated with consumer budgets tightening due to rising inflationary pressures,” Chairman and CEO Ramon Laguarta said in prepared remarks. “I think the consumer is worse than what we had anticipated, and it’s driven mainly by gas prices,” he added on the company’s earnings call.
The North American weakness was stark. PepsiCo’s North American food business reported flat volume for the quarter, while its North American beverage division saw volume decline 4%. Organic sales in the North American foods business declined about 2% during the period. The company attributed much of the deterioration to surging gas prices during the quarter. The national average gas price hit a four-year high of $4.56 per gallon in late May as the United States engaged in military conflict with Iran, a situation that pressured consumer spending broadly and particularly hit convenience store and gas station sales.
The stock market reacted poorly to the results, with PepsiCo shares falling more than 4% in morning trading. The weak domestic performance starkly contrasted with the company’s strong international results, which drove the overall revenue beat. Overseas divisions, including Asia Pacific Foods, International Beverages Franchise, and Europe, Middle East and Africa, all recorded organic volume gains. Global food volumes rose 3% during the quarter, while beverage volumes increased 2%.
PepsiCo has been attempting to reverse a troubling trend in North America for months. In February, ahead of the Super Bowl, the company slashed U.S. prices on Lay’s, Doritos, Cheetos and Tostitos chips by as much as 15%, responding to years of consumer frustration with price hikes. That move briefly boosted snack demand during the first quarter. However, the gains proved short-lived as gas prices spiked in the second quarter, dampening consumer spending across the region. The company is also working to meet changing consumer preferences by introducing new products like Gatorade Lower Sugar, which contains no artificial flavors or colors.
Chief Financial Officer Steve Schmitt acknowledged that the turnaround would take longer than expected. “Our North America business was softer than we anticipated in the second quarter, and we now expect a more gradual improvement in performance trends for the balance of this year,” he said in prepared remarks. He also noted that demand was particularly weak at convenience stores and gas stations, adding that the company hoped improving gas prices would provide some tailwinds in coming months.
PepsiCo said it will continue investing in making its products more affordable, a push partly driven by pressure from activist investor Elliott Investment Management, which disclosed a $4 billion stake in the company last September. The activist has been pushing for cost reductions, price cuts on core brands, and operational improvements. In December, PepsiCo agreed to cut its product offering by roughly 20% and use the savings to invest in lowering prices on core brands and ramping up automation and digitization across U.S. and Canadian operations.
Despite the North American disappointment, PepsiCo maintained its full-year financial guidance, affirming its forecast for organic revenue growth of 2% to 4% and core constant-currency earnings per share growth of 4% to 6%. However, management indicated that results may trend toward the lower end of the earnings guidance range. The company also announced a 4% increase in its annualized dividend per share, marking the 54th consecutive annual increase.
The mixed results underscore the challenging environment facing large consumer packaged goods companies, where inflation and weak consumer spending are forcing companies to choose between maintaining prices and protecting market share. For PepsiCo, the second quarter demonstrated that even a global business with significant international momentum cannot fully offset the drag from a struggling U.S. market where budgets are constrained and consumer confidence remains fragile.