In addition to the 53% plunge in Morgan Stanley earnings driven by a collapse in FICC revenues which plunged 55% from $1.9BN to $873MM, the other major company to report earlier today was Pepsi which, if only uses GAAP data, had more disappointing numbers: total revenues declined by 3% from $12.2BN to $11.86BN, just missing expectations of $11.87BN.
GAAP earnings tumbled by 24% from $1.2BN to $931MM, although since PEP repurchased $619MM in shares in the quarter, GAAP EPS declined a little less, or 21%, from $0.81 to $0.64.
A big reason for this slowdown was China, where Pepsi admitted the "consumer environment has slowed down somewhat".
As the company's CFO Hugh Johnston said in an interview, China played a big role in the 24% drop in PepsiCo's (PEP) 1Q unadjusted net profit to $931M, with the company recording a $373M impairment charge in its 5% equity interest in Chinese beverage JV Tingyi-Asahi Beverages. "The consumer environment has slowed down somewhat there" and while it had some comforting words saying that the company is "continuing to do reasonably well", it "still has work to do."
But so much about GAAP: after all, investors only care about "real" earnings when the company is suffering and the financial reports are actually read.
Instead, when one needs a convenient excuse to BTFD, it is all about non-GAAP, and here Pepsi outdid itself as usual.
As the first chart below from Pepsi's non-GAAP reconciliation shows, the company spun its 3% drop in net revenue into a 3.5% non-GAAP increase.
Since Wall Street was expecting a Pepsi EPS print of $0.81, or the same as last year's GAAP print, management was happy to oblige, and as per the following non-GAAP bridge, it converted the very disappointing $0.64 EPS number into a very "expectations beating" print of $0.89, in the process converting a 21% drop in EPS into a 11% gain!
Entertained yet? If not, here is the punchline - how Pepsi converted a 10% drop in operating profit into a 12% increase:
And so on: take a GAAP miss, add some non-one time, recurring "one-time, non-recurring" charges, and presto: "beat"!
As a reminder, the spread between non-GAAP and GAAP earnings was already close to record wides going into the first quarter.
If Pepsi is any indication, it is about to get even recorder.
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Finally, just to help 17-year-old hedge fund managers reconcile the confusion generated by these two sets of numbers, one ghastly, the other great, it continued the tradition of dramatically dumbing down everything that happens in the quarter with yet another admission that it knows very well who its main "investor base" is these days, namely "attention-deficited", 17-year-old hedge fund managers (and algos of course), all of whom need a simple, portable story on which to BTFD (or BTFATH).
Behold: the infographic. Because when you know precisely who your New Normal target audience is, this is how you should always lay out your results: