Pepsi Q2 FY26 Earnings Prep: Unwinding Shrinkflation
Pepsi‘s strategy over the past three years has focused on phasing in price increases across Frito-Lay brands while accepting lower sales volume, with the expectation that the economics would still work in its favor.
That approach is reaching its limit. Consolidated organic revenue growth fell from 14% in FY22 to 9% in FY23 to just 2% in FY24 and again 2% in FY25, while organic volume remained negative throughout, in the range of -2% to -3% per year. When second-quarter results are released Thursday, the central question will how a company that spent three years raising snack prices will now generate profit by lowering them.
For background, PepsiCo operates primarily through two businesses. The snack and food unit (Frito-Lay and Quaker, reported as PepsiCo Foods North America, or PFNA) manufactures and sells its products directly to retailers, retains the full margin, and serves as the company’s principal profit driver. The beverage unit (PBNA) sells some finished drinks directly and supplies concentrate to bottlers. “Net pricing” refers to the per-unit revenue PepsiCo realizes after discounts and mix. When volume and net pricing move in opposite directions, that divergence is a key indicator of the company’s overall health.
This segment mix has shifted over time. PFNA, the company’s most profitable business, saw revenue stall at approximately $27.5B while operating profit declined from $7.25B (FY23) to $6.62B to $6.17B (FY25). Over the same period, EMEA grew operating profit from $1,764M to $2,106M on revenue rising to $18.0B. The international business is increasingly carrying results as the North American snack unit slows.
Management’s response, formalized in December after Elliott Management disclosed a stake of roughly $4 billion, reverses the pricing strategy along three lines: reducing US SKUs by close to 20% to simplify the product range, lowering prices on core brands to recover volume, and removing cost through plant closures and headcount reductions. The third measure is already visible in the data. Worldwide headcount fell from 319,000 (FY24) to 306,000 (FY25), with US headcount down from 134,000 to 125,000.
The pricing reversal warrants the closest attention, because the entire turnaround depends on it. Frito-Lay net pricing rose +16% in FY22 and +10% in FY23, then slowed to +1% for FY25, and turned negative at -1% in Q1 FY26. For the first time in years, PepsiCo is realizing lower prices per bag, and the effect on volume is evident: PFNA organic volume turned +2% in Q1 FY26 after declining as much as -4% in Q3 FY25. CEO Ramon Laguarta has stated directly that lower prices on core brands should increase volumes. The data supports that so far; whether it does so profitably remains the open question.
The following five items will be the focus heading into Thursday’s report:
Snack Volume Versus Price. Q1 FY26 provided the clearest reading to date: volume +2% against net pricing -1%. That trade-off only strengthens the franchise if the additional volume carries enough margin to offset the price conceded. If Q2 shows volume remaining positive while PFNA operating profit grows year over year, the turnaround is working.
Coca-Cola. The relevant peer test is whether PepsiCo had to discount to achieve what Coca-Cola achieved without discounting. Coca-Cola grew unit case volume
+1% in FY24 and stayed positive through 2025 at +2%, +1%, +1% while holding pricing firm, whereas PepsiCo had to reduce price to return snack volume to
+2%. Watch whether management characterizes the price cuts as a permanent reset of mainstream price points or a temporary measure, because the two imply materially different FY27 margins.
Beverage Profitability. PBNA revenue grew to $28.2B (FY25), yet operating profit fell by roughly half, from $2,302M (FY24) to$1,089M (FY25). Most of that decline reflects a non-cash charge rather than a deterioration in the underlying drinks business. Listen for whether PBNA profit excluding the impairment is recovering, or whether the beverage business is genuinely weakening beneath the writedown.
Productivity Conversion. Headcount is down 13,000 worldwide year over year, and management is guiding to record productivity savings. The question is whether those savings reach margins or are passed to consumers through lower prices. If total segment operating profit grows from the $13,516M FY25 level, that indicates that cost reductions are reaching the bottom line.
One Impairment Footnote. The figure most likely to complicate quick coverage is FY25’s $1,943M intangible impairment, up from just $19M in FY24, with
$1,860M booked in Q2 FY25. That charge is why diluted EPS fell to
$6.00 from $6.95. Because it sits in the year-ago base, the Q2 GAAP comparison will appear favorable for a non-operating reason, so the focus should be on the core operating result rather than the headline GAAP change.
Consensus for Thursday is approximately $24.0B in revenue and about $2.19 in core EPS, up from $2.12 a year ago. JPMorgan recently upgraded the stock to Overweight with a $164 target, while other analysts remain skeptical that discounted consumers will return at all. Management is guiding to FY26 organic revenue growth of 2-4% with improving core operating margin, and continues to return cash, having raised the dividend to $5.62 per share (FY25).
The most important commentary Thursday will concern PFNA margin: a snack business that recovers volume while growing profit would confirm the Elliott-driven reset is working, whereas one that recovers volume but loses profit would indicate PepsiCo has permanently re-based its strongest business to satisfy an activist investor.
All data sourced via #deepKPI from PepsiCo’s FY25 10-K, Q1 FY26 10-Q, and segment disclosures, with additional context from analyst reporting and regulatory filings.