July 20/New York/Associated Press Financial Wire -- PepsiCo Inc.'s second-quarter net income fell 3% on charges related to the company's buyout of its two biggest bottlers, but the same deal pushed up revenue 40% and showed signs of paying off for its U.S. drinks business.

The long-slumping Gatorade business improved for the first time in years as the company rolled out new versions of the sports drink and courted athletes. The highly profitable convenience store and gas station business also improved, though PepsiCo did not want to speculate about sales the rest of the year.

Sales of beverages like Pepsi and snacks like Doritos continued gaining abroad, especially in emerging markets like India and even in Europe, which had been hurting in the weak economy.

Foreign currency fluctuations weighed down results. Some 40% of PepsiCo's revenue comes from outside the U.S. and Canada. A strengthening U.S. dollar can dampen overseas revenue, because sales convert back into fewer dollars.

Overall for the quarter ending in June, PepsiCo earned $1.6 billion, or 98 cents per share, down from $1.66 billion, or $1.03 a share in the same quarter last year.

Without foreign currency fluctuations, the company would have earned $1.09 per share. Analysts had expected $1.08 per share on revenue of $14.41 billion, according to Thomson Reuters. Analysts typically exclude one-time items from their estimates.

Revenue climbed 40% to $14.8 billion, benefiting from the $7.8 billion buyout of PepsiAmericas and Pepsi Bottling Group. However, the company had $155 million in integration charges in the quarter related to the deal, which closed in the first quarter. The company bought its bottlers to be quicker to market with new products and save costs. It predicts saving between $125 million and $150 million this year and $400 million a year by 2012.

PepsiCo's beverage volume in North America rose 13% in the three month period ending in June. However, excluding a new distribution agreement with Dr Pepper Snapple Group Inc., volume fell 1%.

The performance was "dramatically improved" from the 6% volume drop in last year's second quarter, Standard & Poor's analyst Esther Kwon said as she raised her opinion on shares to "Buy" from "Hold" and maintained her $69 target share price.

The U.S. beverage industry has been hurting as shoppers buy juices and teas, rather than soft drinks, or limit their spending in the weak economy. They have also been shying away from convenience stores, which are much more profitable than grocery stores for PepsiCo because it sells smaller packages at a higher per-ounce cost.

The growth in the channel is a "huge deal" for the company, said Jim Tierney, portfolio manager at W.P. Stewart, an investment management firm in New York.

Investors wanted to know the company's expectations for convenience stores the rest of the year, but CEO Indra Nooyi said it was too early to tell.

"Given the economic environment, given where we're seeing all of the unemployment figures headed, let's take it a quarter at a time," she said on a conference call.

Tierney said he was pleased with performance of sports drink Gatorade, which now has multiple versions for before, during and after athletics. The brand, long a sore spot for investors as sales slumped, saw solid growth for the first time in several years. Chief financial officer Hugh Johnston said Gatorade Prime used before games is selling as quickly as PepsiCo can make it and volume in the main Gatorade line is seeing a lift, too.

"We feel terrific about the product," he told reporters on a conference call, "but we have lots of work to do to get Gatorade to what we aspire it to be."

PepsiCo continues to expect earnings per share to grow between 11-13%, on a core constant currency basis, in fiscal 2010. In fiscal 2009, the company earned $3.71 per share.  

From the July 21, 2010, Prepared Foods' Daily News
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