- Spirits leader serves up earnings alert
- ‘Materially weaker’ sales in Latin America
- North America sales are improving
Johnnie Walker whisky and Smirnoff vodka maker Diageo (DGE) has warned first-half profits will disappoint due to worsening sales in the Latin America and Caribbean (LAC) region, where macroeconomic pressures are resulting in ‘lower consumption and consumer downtrading’.
Shares in the world’s largest spirits company tumbled 13.5% to a one-year low of £28.07 on news it now expects to serve up a year-on-year drop in first-half organic operating profit.
The downbeat outlook from Diageo comes just weeks after the FTSE 100 firm told investors operating profit growth would accelerate in the first half of the current financial year.
Softening the blow however was the firm's insistence that it expects to see a ‘gradual’ improvement in organic sales and operating profit growth in the second half of the year to June 2024.
SALES ON THE ROCKS
For the first half of full-year 2024, the drinks-maker now expects growth to slow versus the second half of last year due to a ‘materially weaker performance outlook’ in the LAC division, which speaks for nearly 11% of group revenue and where first-half organic sales are now expected to plunge more than 20%.
In Europe and Asia Pacific, the firm said it saw ‘continued momentum, albeit slower than in the second half of fiscal 23’ with a slower-than-expected recovery in China a drag on performance.
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However, in North America the company highlighted a ‘gradual improvement’ in first half organic sales growth compared to last year’s second half.
And looking ahead to the second half, Diageo expects to see a gradual improvement in group-level organic sales and organic operating profit growth as it continues to invest to ‘drive long-term sustainable growth’.
Guided by chief executive Debra Crew, successor to the late Ivan Menezes, the beverages behemoth behind Guinness stout, Captain Morgan rum and Tanqueray premium gin still expects to deliver medium term organic sales growth in the 5% to 7% range.
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould commented: ‘The last time Diageo issued a major profit warning was in February 2020 when it said the spread of Covid-19 in China – an important sales region for the group – would hit earnings. That situation was out of its hands and it simply had to muddle through what then became a global problem.
‘Diageo has now warned on profit again, blaming materially weaker performance in Latin America and the Caribbean. It also hasn’t helped that the post-Covid recovery in China is slower than expected.’
Mould explained that the gloomier economic environment means ‘some people are trading down to cheaper products or are drinking less often, which means perceived “luxury” companies like Diageo are finding life harder.
‘The idea that luxury goods companies are immune to an economic downturn isn’t stacking up. LVMH, Estee Lauder, Ralph Lauren and Watches of Switzerland have all talked about a slowdown in growth at various points this year, so perhaps Diageo falling into the same pit shouldn’t have been a surprise.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Ian Conway) own shares in AJ Bell.
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