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PepsiCo profit beats but lower margins weigh on shares

Cases of Pepsi are shown for sale at a store in Carlsbad, California, U.S., April 22, 2017. Picture taken April 22, 2017. REUTERS/Mike Blake

By Sruthi Ramakrishnan

(Reuters) - PepsiCo Inc's quarterly revenue and profit beat estimates on demand for its healthier drinks and snacks and higher pricing in North America, but a contraction in the company's gross margins weighed on shares.

Shares of the company, which also warned that margins will remain under pressure in the current quarter, fell as much as 2.3 percent to $111.50. They had gained 9 percent this year.

Pepsi's first-quarter gross margins contracted 45 basis points to 55.97 percent, missing analysts' average estimate of 56.4 percent, according to Thomson Reuters I/B/E/S.

Margins were squeezed by the company's decision to pass on commodity prices to consumers in developing and emerging markets in a staggered manner.

"We don't like to sticker shock the consumers in those markets because we want to keep them in the category," Chief Financial Officer Hugh Johnston said on a post-earnings conference call on Wednesday.

Gross margins had expanded 160 basis points in the year-earlier period.

The Doritos and Gatorade maker said it expected gross margins to rise in the second half of the year.

"The quality of the quarter was disappointing as organic revenue, gross margin, and operating margin all came in weaker than we anticipated," J.P. Morgan Securities analysts wrote in a note.

Revenue in PepsiCo's North America beverage business, the company's biggest, rose 2.3 percent to $4.46 billion, propped up by a 1.5 percent increase in pricing, helping offset a 1 percent drop in volume sales.

PepsiCo and rival Coca-Cola Co have focused on selling smaller, high-margin packs in developed markets while pulling back on promoting large discount packs as they look to cushion the impact of falling demand for fizzy drinks.

Under Chief Executive Officer Indra Nooyi, PepsiCo has been investing heavily to cater to consumers' increasing preference for healthier snacks such as unsweetened tea and baked chips.

PepsiCo said it now gets more than 45 percent of its net revenue from what it calls "guilt-free" products - beverages that have fewer than 70 calories per 12 ounces and snacks that have lower amounts of salt and saturated fat.

These include snacks such as Baked Lays, Quaker Breakfast Flats and new versions of Mirinda and 7UP, which have 30 percent less sugar.

PepsiCo's revenue rose 1.6 percent to $12.05 billion, beating analysts' estimate of $11.98 billion.

Excluding items, the company earned 94 cents per share, beating the average analyst estimate by 2 cents.

Coca-Cola on Tuesday reported a smaller-than-expected quarterly profit on higher costs of franchising its bottling operations and announced job cuts to boost savings.

(Reporting by Sruthi Ramakrishnan in Bengaluru; Editing by Sriraj Kalluvila)