Diageo's glass half-empty as sales forecasts scrapped

These are testing times for Diageo (LSE:DGE), and the immediate challenges are leading to a glass half-empty outlook.

After attempting a brief rally, the share price succumbed to a 5% drop over the last week following the Trump tariff tantrum across most global markets. Although the rhetoric may have been temporarily dialled back, the fact that Diageo imports an estimated 40% of its products for sale in the US from Mexico and Canada is a significant overhang.

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The products which are most affected by such tariffs would be the company's successful tequila brands as well as Canadian whisky, which could leave the group with little option but to hike prices at a time when discretionary spend generally has been under some pressure.

Indeed, the group had previously been damaged by a global environment whereby its premium brands suffered as customers traded down to cheaper alternatives. Unfortunately for Diageo, there could also be societal factors at play. The pandemic “drink at home” boom has long since subsided, in addition to which some are questioning whether the exponential growth in weight-loss drugs is a contributing factor to falling sales.

These numbers reiterate the pressure which is being felt in Europe and Asia Pacific in particular, which contribute 24% and 19% of net sales respectively. Operating profit for the six months ended 31 December 2024 came in at $3.16 billion, a decline of 5% from the corresponding period and below estimates of $3.31 billion.

Perhaps more worryingly, the group has scrapped its medium-term guidance (which had previously been set at what many saw as an overly optimistic range of between 5% and 7% organic net sales growth) until such time as the impacts of any tariffs can be monitored and mitigated. Diageo had been hoping to build on the momentum of the first half, but are now resigned to an uncertain remainder of the year given the latest tariff developments.

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There are some glimmers of hope in the release, however, not least of which is Diageo’s confidence in longer-term prospects. In North America, which accounts for 38% of overall revenues, strong growth was seen, buoyed by a significant 23% increase in net sales from its tequila brands and Don Julio in particular.

The previous weakness in Latin America and the Caribbean (10% of net sales) appears to have stabilised, with operating profit growth of 5% in the period. Net sales overall declined by 0.6% to $10.9 billion, although this was higher than the $10.7 billion which had been expected. At the same time, organic growth of 1% was achieved by a 1.2% boost in prices, offset by a 0.2% decline in volumes.

Meanwhile, the Guinness brand continues its ascent, with growth across many of the group’s geographies and, perhaps unsurprisingly, in Europe in particular. A brief recent rally in the Diageo share price following reports that the brand was being prepared for a spin-off soon evaporated as the group quickly and unequivocally denied the rumours.

In the meantime, Guinness continues to enjoy double-digit growth, which has now been the case for some four years. The brand is estimated to be responsible for around two-thirds of beer sales for the group and for 12% of total revenue, and it appears that this jewel in the crown is one which Diageo is keen to protect.

More broadly, the group has been taking measures to limit the effect of lower volumes such as inventory controls and reduced marketing spend, although adverse currency movements have weighed on progress. Diageo has increased its net cash position to $2.33 billion from a previous $2.15 billion, and has maintained a dividend which currently yields 3.5%, which is of some attraction to income-seeking investors. 

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Even so, the developments over the last year have taken the sheen from a stock traditionally regarded as a core portfolio constituent, despite the group’s sprawling geographical footprint and portfolio of famous brands. The scale of the challenges ahead is reflected in a share price which has fallen by 20% over the last year, as compared to a gain of 12.7% for the wider FTSE100 and by 34% over the last two years.

It therefore follows that until such time as an improvement in customer demand becomes evident and the true impacts of any tariffs can be dealt with, the market consensus of the shares as a hold is likely to remain in place.