PepsiCo Maintains Food and Beverage Volume Growth. Here’s Why Earnings Are Under Pressure Anyway.

PepsiCo (NASDAQ:PEP) is coming off an interesting quarter in which the company beat Wall Street consensus estimates but lowered its full-year profit guidance.

Shares rose over 3.7% on Oct. 8.

In its third quarter of fiscal 2026, Pepsi reported adjusted earnings per share of $2.34, $0.05 ahead of estimates. Revenue of $25.27 billion also topped expectations by about $310 million.

On the plus side, Pepsi grew volume in its convenience foods division by 1% year over year, while beverage volume grew by 3%. Management also raised its net revenue guidance for fiscal 2026 from a range of 4% to 6% to roughly 6%.

But not everything was positive. Management cut the company’s full-year fiscal 2026 core earnings per share guide from 5% to 7% growth to 2.5% to 3.5%.

Here's why Pepsi experienced some pressure in the third quarter, despite the volume growth and top- and bottom-line beat.

Image source: The Motley Fool. Image source: The Motley Fool.

North America lagging

Pepsi has been trying to revamp its business in the wake of shifting consumer preferences, GLP-1 drugs, high costs, and pressure from the activist investor Elliott Management, which has built a $4 billion stake in the company.

Earlier this year, Pepsi slashed prices on some of its key snack brands, such as Lay's and Doritos. Management has also been trying to make snacks healthier by increasing their protein and fiber content.

But during the quarter, the North America division continued to struggle, with beverage volume down 2% year over year, while convenient foods volume was flat.

The company also experienced an increase in operating expenses and marketing and advertising costs, which led to the core operating margin contracting 0.35% to 16.9%. Tariff refunds also lifted core operating profit 4%, which otherwise would have been down year over year.

"Our business in North America performed below our expectations and represents a meaningful opportunity for improvement," PepsiCo's CEO Ramon Laguarta said during a CNBC interview following the release of earnings.

In light of these struggles, Laguarta said the company would cut corporate and overhead costs across the organization, which could be reinvested in the North American business. This could be one reason to explain the solid rise in shares on Oct. 8 following the earnings report.

Reuters also reported in late September that the company is planning to raise prices on some of its snacks to keep pace with inflation. A company spokesperson at the time said the hikes will be on certain chip brands in the low- to ​mid-single-digit percentage range.

A complex road ahead

Pepsi is not the only large food and beverage company struggling. Kraft Heinz has also been looking into strategic alternatives, and nearly split the business into two companies in 2025, until that plan was shelved.

Elliott Management has also been looking for ways to unlock shareholder value, and has previously urged Pepsi to explore alternatives such as cutting costs, eliminating underperforming brands, and even spinning off the company's bottling network.

During the recent CNBC interview, Laguarta said the company currently has no plans to split the snacks and beverage businesses.

Ultimately, the quarter wasn't all bad, with some bright spots. Investors were also likely pleased to hear the company is planning to cut costs.

However, price cuts from earlier this year may have contributed to higher volume, and there are other sources of pressure, whether from inflation or industrywide challenges. The company still has much work ahead.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.