Case Study

$1-2$ PepsiCo: Communicating Financial Performance$*$

The Chairman's letter to the shareholders from PepsiCo's $2007$

Annual Report is presented below.

Delivering Performance with Purpose in $2007$

Dear Shareholders:

We have titled this year's annual report "Performance

with Purpose: The Journey Continues." That's because in

Source: $2007$ PepsiCo Annual Report

$2007$ PepsiCo made great progress toward the long$-$term cor$-$

porate objectives we set for ourselves last year: To achieve

business and financial success while leaving a positive

imprint on society.

Once more, our extraordinary associates around the

world delivered terrific performance, and I am delighted to

share with you the following $2007$ financial results:

Net revenue grew $12\%,$ roughly three times the rate of

global GDP growth. $-$ Division operating profit grew $\backslash (10\backslash \%\backslash ).$

$-$ Earnings per share grew $\backslash (13\backslash \%\backslash ).$

$-$ Total return to shareholders was $\backslash (26\backslash \%\backslash ).$

$-$ Return on invested capital was $\backslash (29\backslash \%\backslash ).$

$-$ Cash flow from operations was $\backslash (\backslash$$ $6\mathrm{.}9\backslash )$ billion.

In $2007$ PepsiCo took important steps to support future growth.

What makes me particularly proud is that our $2007$ performance was strong $-$ not just measured by these short$-$term metrics $-$ but also with the long$-$term equally in mind:

$-$ We increased capital expenditures in plant and equipment worldwide to enable growth of core brands and expand into new platforms such as baked and crisp$-$bread snacks and non$-$carbonated beverages.

$-$ We added several tuck$-$in acquisitions in key markets and segments, and we further expanded our successful coffee and tea joint ventures.

$-$ We created the Chief Scientific Officer position to ensure our technical capabilities keep pace with increasingly sophisticated consumer demand; and we funded incremental investment to explore breakthrough R$\backslash$&D opportunities.

$-$ We maintained focus on building next$-$generation IT capabilities with Project One Up$,$ to support our long$-$term growth prospects worldwide.

Our brands once again demonstrated competitive strength. On the ground, in cities and towns around the world, good brand strategies were implemented with operational excellence. I$\text{'}$d like to share a few notable examples of the big marketplace wins we enjoyed in $2007$:

$-$ Our carbonated soft drink and savory snack brands gained market share in the United States and in many of our top international markets.

$-$ In the United Kingdom, Baked Walkers crisps was named "New Product of the Year" by Marketing Week magazine.

$-$ SunChips snacks delivered double$-$digit growth in the United States as a result of great, innovative marketing and in$-$store execution.

$-7$UP H$2$Oh$!$ was our fastest$-$growing brand in value and volume share in Brazil in its launch year.

$-$ Pepsi Max came of age as a global brand, with outstanding performance in the United States as Diet Pepsi Max, after successes in Northern Europe and Australia and $2007$ launches across Asia.

$-$ PepsiCo beverage brands crossed the $\backslash (\backslash$$ $1\backslash )$ billion mark in Russia retail sales.

$-$ We posted double$-$digit volume growth in China beverages and high$-$single$-$digit beverage volume growth in India

And we did all of this while battling increased commodity inflation and more macroeconomic volatility than in previous years.

Required

In her review of PepsiCo's performance in $2007,$ Indra Nooyi, PepsiCo's Chairman and CEO, claims that, "Net revenue grew by $\backslash (12\backslash \%\backslash ),$ roughly three times the rate of global GDP growth." What message is she trying to convey in this statement? After reviewing the disclosure "Results of Operation $-$ Division Review," which is found in the notes to the financial statements, do you agree with Mrs$.$ Nooyi's assertions about PepsiCo's growth?

Consolidated Statement of Income

PepsiCo, Inc. and Subsidiaries: Fiscal years ended December $29,2007,$ December $30,2006,$ and December $31,2005$

Net Income per Common

Share

Basic

Diluted

$\backslash (\backslash$$ $3\mathrm{.}48\backslash )$

$\backslash (\backslash$$ $3\mathrm{.}42\backslash )$

$\backslash (\backslash$$ $2\mathrm{.}43\backslash )$

$\backslash (\backslash$$ $3\mathrm{.}41\backslash )$

$\backslash (\backslash$$ $3\mathrm{.}34\backslash )$