Up-market drinks group Diageo (DGE) disappointed the market again with its interim results which missed expectations at the top and bottom line due to weak sales in the Americas.

Diageo shares slid 3.75% to £27.35 taking them to the bottom of the FTSE 100 performance table and back towards their 12-month lows, reversing most of last week’s gain on the LVMH (MC:EPA) results.

BELOW-PAR FIRST HALF

Group net sales for the six months to December declined 1.4% to $11 billion, short of the consensus forecast of $11.2 billion, due to a $167 million foreign exchange headwind and more importantly a $310 million or 23% drop in Latin American and Caribbean sales driven by customers trading down to cheaper alternatives.

At the same time, sales in North America were down 1.5% as the firm maintained its focus on pricing and margins in order to drive what it calls ‘high-quality share growth’ in its largest region.

Compounding the lower-than-expected sales numbers, adjusted operating profit of $3.5 billion was down 5% on an organic basis and well short of the average forecast of $4.2 billion due once again to weakness in Latin America and the Caribbean.

Chief executive Debra Crew put the miss down to ‘fast-changing consumer sentiment and high inventory levels’ and said the firm had made it a key priority to lower inventory levels in the region by the year-end, although that still won’t address the weak sales outlook.

Crew remained upbeat on the second half, saying ‘despite continued global economic volatility, we expect to deliver improvement in organic net sales and organic operating profit growth at the group level, compared to the first half’.

‘While the macro environment will continue to present challenges, I am confident that we remain well-positioned and resilient for the long term’, continued the chief executive.

‘We are diversified by category, price point and region and will continue to invest behind our iconic brands to maintain our position as an industry leader in total beverage alcohol, an attractive sector with a long runway for growth.’

EXPERT VIEWS

‘Despite the enduring quality of the business, there is no getting away from the fact that these latest numbers are not good from Diageo’, commented Quilter Cheviot research head Chris Beckett.

‘Much of the figures out this morning reiterate what was said at its profit warning in November, with sales falling a little further than expected. Latin America continues to be the problem as it struggles to sell its higher end products in that market, while the US is also seeing weakness in the vodka and rum sectors.’

Russ Mould, investment director at AJ Bell, put the Diageo results into context: ‘We’ve already seen in other parts of the luxury market that the wealthy are not immune from a higher cost of living and higher interest rates. Therefore, Diageo needs to be more creative with how it convinces consumers to buy its products. Plans to offer smaller pack sizes of Casamigos, for example, don’t seem innovative enough.

“Work needs to be done in the marketing department to get everyone talking about certain brands, just like it did in 1999 with the iconic surfers and horses advert for Guinness.’

Disclaimer: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Ian Conway) and the editor (Martin Gamble) own shares in AJ Bell.

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