ii view: Diageo shares crash 15% after profits warning

First-half trading update from 1 July to 9 November 

• Latin American and Caribbean sales expected to fall by more than 20% year-over-year
• First half group operating profit now expected to decline year-over-year

Medium term guidance to 2026:

• Growth in operating profit is now expected to grow between 5% to 7%, down from a previous 6% to 9%

ii round-up:

Alcoholic drinks maker Diageo (LSE:DGE) today warned of slower than expected sales at its Latin America and Caribbean region as economic headwinds have caused consumers to trade down to cheaper brands.

Sales in the region, accounting for 11% of overall group revenues, are now expected to decline by a fifth over the first half of the 2024 financial year compared to City estimates for 1.7% growth. As such, total group profit for the first half to the end of December is now expected to decline year-over-year compared to City forecasts for a 4.6% improvement.

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Shares in the FTSE 100 company fell by more than 15% in UK trading having come into this latest news down by just over a tenth year-to-date. Rival Pernod Ricard SA (EURONEXT:RI) is down around a tenth during 2023, while the FTSE 100 index itself is little changed. 

Diageo is the world's largest premium spirits company, with an estimated 30% share of the global market. 

Sales for its biggest profit generator North America are still expected to grow during the current first half compared to the second half to June. So are sales at its African business. European and Asian sales had seen continued momentum, although growth had slowed compared to the prior second half.

Against the backdrop of ongoing cost pressures and geopolitical and economic uncertainty, Diageo also reduced its medium-term profit forecast to the year 2026. Growth in operating profit is now expected to prove inline with expected sales growth of between 5% and 7%, as opposed to a prior management forecast of 6-9%. 

A Capital Markets Event in New York is pencilled in for 15 November, with first-half results to the end of December scheduled for 30 January. 

ii view:

Diageo was formed back in 1997 when Grand Metropolitan and Guinness agreed a merger. Today it sells over 200 brands including Johnnie Walker whiskey, Smirnoff vodka, and Guinness in more than 180 countries. Around 81% of its sales come from spirits, with a further 14% from beer including Guinness and the balance of 5% largely from ready-to-drink or pre-mixed cocktails. The FTSE 100 company also owns a 34% stake in Moët Hennessy and 55% of United Spirits in India. A move to reporting in US dollars is now being made. 

For investors, the difficult economic headwinds impacting its Latin America and Caribbean business cannot be ignored. Sales for Europe have also slowed. Consumer spending globally remains pressured from rising costs such as those related to borrowing and energy. Costs for businesses themselves remain generally elevated, while ethical concerns regarding alcoholic consumption may also deter some investors.  

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On the upside, a diversity of product brands and geographical regions do help balance out challenges. Population growth and increasing emerging market wealth should also assist progress over the long term. Management remain focused on cost savings and shareholder returns, with the dividend payment rising for more than 15 consecutive years, leaving its shares offering a forecast dividend yield of 2.6%.   

In the short term, there is room for further share price volatility and, if conditions continue to deteriorate, shares could fall again. However, fans of the company will likely argue that Diageo has delivered consistent growth over many years in better economic times. It explains why there's been some bargain hunting following today's slump. 

Positives: 

• Stable of diverse and well-known drink brands
• Enviable dividend growth track record

Negatives:

• Uncertain economic outlook
• Exposure to currency risk

The average rating of stock market analysts:

Strong hold