ii view: Diageo pins hopes on new chief executive

First-quarter trading update to 30 September

• Net sales down 2.2% to $4.9 billion (£3.7 billion)
• Organic or sales stripped of acquisitions proved flat
• Volumes up 2.9%
• Product prices down 2.8%

Guidance:

• Now expects full-year organic sales of flat to slightly down versus previous growth forecasts similar to last year (+1.7%)
• Now expects full-year adjusted profit (EBIT) growth of low to mid-single digits, down from a previous mid-single digit forecast 

Interim chief executive Nik Jhangiani said:

"Net sales were flat organically in Q1, with growth in Europe, LAC and Africa offset by weakness in Chinese white spirits and a softer US consumer environment than planned for. 

“We are not satisfied with our current performance and are focused on what we can manage and control; acting with speed to drive efficiencies, prioritising investment and adapting more quickly to an evolving consumer environment.”

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ii round-up:

Diageo (LSE:DGE) is the world's largest premium spirits company with an estimated 30% share of the global premium spirits’ market. 

Spirits generate most sales during the first half at 79%, followed by beer at 16%, pre-mixed or Ready-to-drink products 3.5% and other items a balance of 1%.   

For a round-up of this latest trading update announced on 6 November, please click here.

ii view:

Formed via a merger of Grand Metropolitan and Guinness in 1997, Diageo today sells more than 200 drink brands in almost 180 countries. Brands include Johnnie Walker whiskey, Smirnoff vodka, Captain Morgan rum, Don Julio tequila, Bailey’s cream liqueur and Guinness stout.  

Geographically, North America accounted for its biggest slug of sales during the first half at 40%, followed by Europe at 24%, Asia Pacific at 18% and both Latin America and the Caribbean, and Africa, 9% each. The FTSE 100 company also owns a 34% stake in Moët Hennessy and 55% of United Spirits in India.

For investors, concerns about changing drinking habits and consumer moderation cannot be ignored. Trade tariffs now raise the cost of its products in the US, its biggest marketplace. Extended alcohol restrictions in China appear to be having an impact. Stretched consumer spending globally may be pushing some customers to downgrade to cheaper supermarket own brands, while ethical concerns regarding alcoholic consumption may also deter some investors.  

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On the upside, new chief executive Dave Lewis, due to take up the role on 1 January, has extensive experience at Tesco (LSE:TSCO), Unilever (LSE:ULVR) and Haleon (LSE:HLN) and will look to reinvigorate strategy at the drinks giant. Non-alcoholic organic net sales rose 40% over its last financial year, including Guinness zero. Targeted cost savings were previously raised to $625 million from $500 million with around half expected to be reinvested back into the business, while potential business sales could see funds redirected towards share buybacks. 

For now, risks remain with improved demand from US consumers a key part of any recovery. That said, a forecast dividend yield of over 4.5% is paying investors to be patient, with a sum-of-the-parts valuation estimated at over £22 per share likely to keep investors interested.  

Positives: 

• Stable of diverse and well-known drink brands
• Market leader in non-alcoholic spirits 

Negatives:

• Uncertain economic outlook
• Exposure to currency risk

The average rating of stock market analysts:

Buy