Diageo reported third-quarter net sales of $4.5bn, up 0.3% on an organic basis (-2.3% expected). The better-than-expected performance was driven by several regions benefitting from an earlier Easter, and an uplift in trade sales ahead of the FIFA World Cup.
Sales in North America fell 9.4% (-10.0% expected), due to ‘soft market conditions’ and a tough comparable year which benefitted from the pull-forward of sales ahead of US tariffs.
Full-year guidance remains unchanged, with organic net sales expected to decline by between 2-3%. Organic operating profit growth is expected to be flat to low-single digits.
The shares rose 4.8% in early trading.
Our view
Diageo delivered a better-than-expected third-quarter performance, driven largely by the helpful timing of Easter and businesses stocking up ahead of the FIFA World Cup this summer. The North American market remains challenged though, leading the company to hold full-year guidance firm.
Diageo is a giant in the alcohol world, with 13 billion-dollar brands on its shelves. Its world-class stable of spirit brands includes the likes of Smirnoff, Johnnie Walker and Tanqueray. In beer, Guinness remains a stout performer, recording yet another period of strong revenue growth.
The past few years have seen a trend towards more premium brands, which has helped to prop up margins. That trend now appears to be slowing in most regions, and the outlook for near-term sales growth looks weak.
Freshly minted CEO Sir Dave Lewis can hardly be blamed for the poor sales performance, given he only got his feet under the desk at the start of the year. He’ll need time yet to identify key areas of improvement and formulate a remedy, which he’s expected to present to markets before October.
Ongoing uncertainty surrounding the conflict in the Middle East is another issue. It has the potential to disrupt the group’s supply and distribution channels and to raise costs due to higher energy prices.
To help offset this, Diageo’s looking to streamline operations elsewhere in the business, aiming to achieve total cost savings of $625mn over the next three years. Half of this will fall to the bottom line to improve profitability, while the other half will be reinvested in the business to drive future growth.
Trends such as the rise in use of GLP-1s (for anti-obesity) and a structural shift in alcohol consumption, particularly among younger consumers drinking less, shouldn’t be overlooked. Both have the potential to weigh on future sales volumes, which would compound Diageo’s woes if pricing power remains pressured.
With net debt sitting on the wrong side of the group’s target range last we heard, and the new CEO’s moved decisively by cutting the dividend in half to help shore up the balance sheet. This is a stark reminder that shareholder returns are never guaranteed.
We see the group as fundamentally strong, with a world-class stable of brands to fall back on. But a subdued alcohol market, especially in the US, has damaged the valuation. We’re eager to hear how the new CEO plans to transform the business later in the year. But until then, with continued uncertainty around demand, some caution would be wise.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry-wide, especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.
According to Sustainalytics, Diageo’s management of ESG risk is strong.
The group aims to achieve net zero emissions by 2050, or sooner, with Scope 1,2 & 3 emissions targets in place. Diageo has set water reduction targets and deadlines, however, it does not disclose its initiatives to achieve this and there is no external certification for its environmental management activities.
Diageo key facts
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