(FROM THE WALL STREET JOURNAL 2/8/16)
By Mike Esterl
Coca-Cola Co. and PepsiCo Inc. will reveal this week whether
Americans are spending more freely on soda and potato chips, as
consumers pocket savings at the gas pump.
But in reporting their fourth-quarter results, the
globe-trotting U.S. companies are also expected to take a hit from
foreign-exchange rates in overseas economies like China, whose
weakness helped trigger crude oil's free fall.
Coke and PepsiCo command big shelf space in U.S. convenience
stores at gas stations, just steps from where drivers are filling
up for less. Last month, oil prices fell below $30 a barrel for the
first time since 2004.
Gasoline prices have fallen 50% over the past 18 months and are
below $2 a gallon in most states.
Soda-industry leader Coke, which also sells Dasani water and
Minute Maid juice, is set to report year-end resultson Tuesday.
PepsiCo, whose brands include Lay's and Doritos chips and
Gatorade sports drinks, reports on Thursday.
In a sign of an oil windfall, nonalcoholic beverage sales rose
5.5% in the fourth quarter at U.S. convenience stores, faster than
at supermarkets, according to a survey by Wells Fargo.
Convenience-store owners expect soda sales to rise 3.8% this
year and sales of bottled water, energy drinks and ice teas each to
grow at least 7%.
It isn't just convenience stores that are getting a lift. U.S.
salty-snack sales across all types of retailers rose 4.5% in the
four weeks ended Jan. 23, including a 4.1% rise for PepsiCo
products, according to Morgan Stanley.
Beverage companies also have raised prices aggressively in
recent months, stabilizing their intake from U.S. soda sales after
a two-year downturn.
But accelerating U.S. sales are no sure thing.
Personal-consumption growth slowed to 2.2% in the fourth quarter,
down from 3% in the third quarter, as the U.S. economy expanded
just 0.7%.
The U.S. personal-savings rate also rose to its highest level
since 2012, as some consumers chose not to spend extra money in
their pockets.
Mark Sutton, chief executive at International Paper Co., which
makes boxes for e-commerce and takeout containers for restaurants,
said Wednesday that lower gasoline priceshaven't boosted
consumption as the company had expected.
"We thought we'd see more consumer demand, but it looks like the
consumer is saving a little more and buying expensive things like
automobiles and going out less to restaurants," Mr. Sutton said in
an interview.
But Donnie Smith, CEO of meat processor Tyson Foods Inc., told
analysts on Friday that consumers were relishing lower gas prices,
as both food-service traffic and spending per visit increased in
the past quarter.
History shows a mixed bag. When fuel prices fell in past years,
U.S. consumer sentiment typically improved but overall consumption
dropped, according to Bernstein Research. And while beverage sales
often grew, food sales often slackened.
The picture is bleaker for Coke and PepsiCo in foreign markets,
which generate about half of their revenue.
Russia and Brazil are mired in recession, consumer demand
remains tepid in Europe and Japan, and growth is slowing in China,
the world's second-largest economy.
Both companies' fourth-quarter results also will again show the
effects of translating their overseas revenue and profit into a
strengthening dollar.
Coke warned in November that currency fluctuations would
subtract 7 percentage points from growth in revenue and 13
percentage points from operating income in the fourth quarter.
CLSAbrokerage last month cut its 2016 earnings-per-share
estimate for PepsiCo to $4.68 from $4.85, estimating exchange rates
would have a negative impact of 5.5 percentage points on revenue,
up from its earlier estimate of 2 percentage points.
It cut its 2016 estimate for Coke to $1.91 from $1.95 a share,
raising the negative impact on revenue of foreign currencies to 2.7
percentage points from 1.4 percentage points.
Overseas turmoil has sent many sector investors into the arms of
Dr Pepper Snapple Group Inc. The company, which is the
third-largest U.S. nonalcoholic beverage company by sales behind
Coke and PepsiCo, derives about 90% of its revenue in the U.S.
Shares of Dr Pepper Snapple, which reports its quarterly results
on Feb. 17, have risen 16% over the past year, while shares were
basically flat at PepsiCo and Coke.
Analysts surveyed by Thomson Reuters expect Coke to report
adjusted fourth-quarter earnings of 37 cents a share, down from 44
cents a share a year earlier.
Revenue likely dropped to $9.91 billion from $10.87 billion,
according to the consensus estimate.
PepsiCo is expected to report adjusted earnings of $1.06 a
share, down from $1.12 a share, with revenue declining to $18.51
billion from $19.95 billion.
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The Week Ahead looks at coming corporate events.
(END) Dow Jones Newswires
February 08, 2016 02:47 ET (07:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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