NEW YORK — A slowdown in PepsiCo’s Frito-Lay salty snacks division, amid a deceleration in the overall snacks market, led investment firm TD Cowen to lower its sales forecast for the food and beverage company heading into next year.

In a July 3 research note, analyst Robert Moskow projected PepsiCo’s sales growth at below 4% for 2024 and 2025 – lower than its previous estimate of above 4% and the food company’s 4% to 6% target – but upheld TD Cowen’s adjusted earnings per share (EPS) outlook at $8.17 and $8.83, respectively.

“Unexpected near-term weakness in the US salty snacks category presents a significant challenge to the company’s sales guidance in the near term,” Moskow wrote. “We lower our 2024 and 2025 sales estimates to 3.8% but keep EPS unchanged, owing to flexibility in the P&L from significant productivity.”

TD Cowen’s US retail tracking data show salty snacks sales for Frito-Lay dipped 0.7% and market share was down 50 basis points for the 12 weeks ended June 1. Frito-Lay accounts for 27% of Purchase, NY-based PepsiCo’s net sales, TD Cowen reported.

“We see rising probability that Frito and other snack companies will need to increase investment in promotional discounting beyond their initial plans to improve their volume trends,” Moskow explained. “Salty snacks sales growth in 2024 – and snacking categories in general – now look weaker than the rest of packaged foods, with sales at zero percent and price elasticity at -0.9. PepsiCo says that they have experienced pressure in the commoditized segments of Frito-Lay's portfolio and in certain larger-sized bags.

“Consensus for this division to return to its normal mid-single-digit growth rate in the back half of 2024 now appears overly optimistic,” he added.

Frito-Lay’s volume is “firmly in negative territory” despite positive pricing, Moskow observed, noting that “less differentiated, unflavored brands” have seen more pressure. One factor has been declining foot traffic in convenience stores, which represent about 21% of Frito-Lay’s US net sales, he said. TD Cowen’s data indicate year-to-date salty snack sales as down 1.7% in the convenience channel versus a 0.6% uptick across all retail outlets, reflecting a trend in total snack sales of down 1.7% in convenience stores and up 0.5% across all retailers. Moskow called the trend a “significant headwind” to category price realization and profitability for the brand.

“The slowdown in Frito-Lay has negatively impacted PepsiCo's US retail sales – about 55% of total company (sales) – to a material degree,” Moskow wrote in his report. “In fact, the company’s beverages division is now growing at a slightly higher pace, even though it is less competitively advantaged versus peers and participating in a weaker category. In total, our tracking data indicates PepsiCo’s US retail sales down -1.8% in calendar 2Q, marking no improvement versus the tepid -1.8% (decrease) in 1Q. This makes it difficult to believe the company’s forecast for sequential improvement in the second half to mid-single digits.”

For the fiscal 2024 first quarter ended March 23, PepsiCo reported net revenue growth of 2.3% year over year (2.7% organic), including a 2% gain (also 2% organic) for Frito-Lay North America, with adjusted EPS of $1.61. The company forecast organic net revenue growth of at least 4% and adjusted EPS of at least $8.15 for the full year. Analysts, on average, project PepsiCo’s adjusted EPS at $8.16 (range of $8.11 to $8.21) for fiscal 2024, with a high-end revenue estimate of 4%, according to LSEG Data & Analytics.

“We believe the stock (PepsiCo) will remain range-bound in the near term, as the company grapples with weak demand in US salty snacks and market share losses in US beverages,” Moskow wrote. “Over the medium term, we believe PepsiCo can return to its targeted 4% to 6% sales growth and high-single-digit constant currency EPS growth algorithm, though expect the company to be at the low end of this range in 2024.”

Snack sales, in general, have slowed. In the TD Cowen report, Moskow noted that the five biggest snack categories had a compound annual growth rate of 7.8% from 2019-2023, “well above” the rate for broader food categories. “However, much to our surprise – and investors’ too – sales trends have decelerated sharply in 2024 to an average pace of 0% in 2024, compared to 1.2% for broader food,” he said.

On the consumer side, factors contributing to the deceleration in snacks include “lingering price shock,” lower-income shoppers cutting discretionary spending and a decrease in snacking occasions since Americans have returned to working in the office post-pandemic, Moskow said.

“Like most of the food industry, management teams of snack companies attribute the slowdown to price shock,” he explained. “Consumers have yet to acclimate to the 25%-plus price increases in snack products they are seeing on shelves. They view this a transitory issue that will normalize as wages continue to rise and consumers eventually realize that these higher prices are ‘the new normal.’ Historically, this has proven true, but economists and industry experts have been surprised by how long it has taken consumers to acclimate to the current environment.”