Diageo shares slide amid North America sales decline

Shares in Diageo fell in early trading today (30 January) after the Casamigos Tequila owner reported a fall in underlying sales in North America.

For the six months to the end of December, the UK-based beer and spirits giant booked a 2% decline in its North American net sales on an organic basis.

The half-year figure compared to flat organic sales in North America in Diageo’s fiscal year to the end of June and missed analyst forecasts of a 0.7% decrease.

Diageo’s net sales in North America from Tequila fell 5% as Casamigos’ sales slid 14%. The company said the brand was “lapping double-digit growth as distributors replenished inventory in the prior year”.

The company said its overall North American organic net sales had “improved sequentially from the second half of fiscal ‘23”.

Speaking to reporters after the results were published, Diageo CEO Debra Crew said North America’s spirits market was still in the process of resetting after Covid-19.

“The US consumer environment is still normalising from the Covid supercycle,” Crew said. “Sentiment is improving versus the prior year but consumers are still facing multiple headwinds. Our consumers are resilient but they’re also still cautious and choiceful. Premiumisation continues but there are some pockets of downtrading.

“Fiscal year to date, we’re seeing the spirits industry grow in the low single digits. The path back to industry normalisation in the US will not be linear and will recover more gradually.”

Overall, the Johnnie Walker and Guinness maker’s first-half net sales stood at $10.96bn, down 1.4% on a reported basis and 0.6% organically. Analyst consensus expectations were for net sales to be flat year on year on an organic basis.

Operating profit dropped 11% to $3.32bn. Organically, operating profit before exceptional items fell 5.4% to $3.51bn. The consensus forecast among City analysts was for a 4.7% decline.

Profit attributable to the company’s shareholders slid 18% to $2.21bn.

Crew said the numbers were “in line” with a trading update the company gave in November, in which it issued a profit warning amid pressure on its business in Latin America.

“We are not satisfied with these results and I personally am restless to get this business to perform to its full potential,” she added. “We’ve had some successes in the half namely the knockout performance of Guinness, share gains in Johnnie Walker and strong performances in India, China and GB [Great Britain].”

Diageo on Latin America inventories

In November, Diageo said “lower consumption and consumer downtrading” had hit sales from its Latin America and Caribbean (LAC) business, meaning it was left with higher-than-expected inventories. At the time, Crew also pointed to “extremely high comps”, with the group lapping a period when sales grew 20% organically.

Crew said Diageo had “probably a few months” additional stock in the region but it was “confident” it could get inventories down to a more “appropriate” level in the region by the end of its current fiscal year.

“A lot of this will depend upon the consumer demand and what kind of pull-through we get but we do see getting through this within the half,” Crew said. “Certainly, we will be watching that. We’ve got a lot more monitoring in place. We’ve got more sell-through data that we are looking at, literally weekly. We’re confident that we can get through this and reduce it to that more appropriate level for the current consumer environment.”

In Europe, Diageo’s reported net sales were up 10% and 3% organically.

The company pointed to “double-digit growth in Turkey and high single-digit growth in Great Britain and Ireland”.

Net sales from spirits in Europe were flat but, from beer, rose 20% thanks to “positive volume and price/mix”.

On an organic basis, Diageo’s sales volumes in Europe were down 4%.

The operating profit from the company’s business in Europe dropped by 6% and by 3% on an organic basis. Diageo said its margins in Europe had suffered as “strong strategic price increases were more than offset by cost inflation and increased marketing investment”.

In a note to clients this morning, analysts at AllianceBernstein said: “Diageo announced FY24 results this morning, posting a weak print which if anything has amplified the key concerns weighing on the stock.

“The weak print won’t help solve the doubts over management's credibility, especially as the key concerns – US Tequila slowdown, LatAm inventory correction – were amplified and [a] new one emerged, for example, European margins.”

Shares in Diageo stood at 2,764.5p at 12:01 GMT, down 2.69% on the day.

Over the last year, the stock has fallen 18.93% in value.

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