Checking In With PEP: Updating For 2027 Cost Pressure

Research evidence excerpt

Checking In With PEP: Updating For 2027 Cost Pressure

I N D U S T RY NO TE

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Adjusting our gross We expect gross margins to be pressured in 2Q26 as finished goods (like Alani Nu), which are a

margin estimates drag to margins, become a larger part of PBNA’s mix, while PFNA also has a full quarter of price

cuts. It has an easier gross margin lap in 3Q26 as it laps a full quarter of tariffs with no mitigation

in 3Q25. PEP has a structured hedging program for what it can hedge and typically hedges 6-12

months out, though has some flexibility depending on the environment. Potatoes, seasonings and

anything produced by co-manufacturers aren't hedged, but PEP has contracts in place for most of

these inputs. PEP’s costs are well covered until mid-4Q26, so we expect some incremental cost

pressure to start to flow through then and likely persist in 2027, given the length of time elevated

costs for oil and other inputs has already lasted. We now lower our 2027 gross margin estimate to

54.0%. We expect gross margins to be down ~40bps in 2026.

Tariff refunds likely PEP paid just over $200M in tariff related costs in 2025, mostly skewed to concentrates. A small

get reinvested portion of the $200M was tariffs paid by its suppliers that they flowed through to PEP. PEP has not

received any tax refund yet and any amount it may receive is still unknown. We believe any tariff

refund likely gets reinvested. It likely won’t use refunds to increase the level of its already planned

investments but could use the cash for other projects or to postpone or mitigate potential pricing.

International PEP’s momentum in international has continued in 2Q26. Developing and Emerging markets are

momentum remains performing well and are outpacing developed markets.