Diageo shares hit four-year low

By James Bayley

Published: 31 July, 2024

Diageo has cautioned that financial challenges may extend into next year after the company fell short of its full-year profit expectations, leading to a more than 9% drop in shares to a four-year low.

The world's leading spirits producer, known for brands such as Johnnie Walker whisky and Tanqueray gin, has faced difficulties in regaining investor trust. This follows a surprising accumulation of unsold inventory in Mexico and Brazil last November, which led to a profit warning.

The drop was mainly due to a 21.1% decrease in the Latin America and Caribbean (LAC) region. Organic operating profit decreased by $304m or 4.8%, with $302m attributable to LAC. The organic operating margin contracted by 130 basis points.

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Diageo reported a 1.4% decline in net sales to $20.3bn, impacted by unfavourable foreign exchange and a drop in organic net sales, partially offset by hyperinflation adjustments. However, operating profit grew by 8.2%, with the margin increasing by 262 basis points, primarily due to exceptional operating items.

Organic net sales fell by $129m or 0.6%, with a 2.9 percentage points increase in price/mix outweighed by a 3.5% volume decline.

Excluding LAC, organic net sales grew by $330m or 1.8%, driven by a 3.9 percentage points increase in price/mix, despite a 2.1% volume decline. North America’s 2.5% decline in organic net sales was offset by growth in Africa, Asia Pacific and Europe. Organic operating profit saw a slight decline of 0.1%, and the organic operating margin contracted by 56 basis points.

Chief executive Debra Crew stated that fiscal 2024 was challenging due to macroeconomic and geopolitical volatility, but highlighted the company’s strategic progress.

Crew emphasised Diageo’s focus on managing inventory issues in LAC, strengthening consumer insights, and enhancing market strategies, including a significant transformation in the US spirits organisation.

“Diageo is a resilient business, benefitting from its global reach and unrivalled brand portfolio. With iconic brands that have been enjoyed for decades, Diageo takes a long-term view, and will continue to invest in our brands, people and diversified footprint to deliver sustainable long-term growth and generate shareholder value,” Crew said.

Diageo reported a 4.8% decline in organic operating profit, primarily due to the $302m decrease in LAC and a $142m decline in North America. The decline was also influenced by increased investments in strategic capabilities, including digital enhancements and market routes, especially in the US. The reported operating margin expanded by 262 basis points, while the organic operating margin contracted by 130 basis points due to weak performance in LAC and a cautious US consumer environment.

Looking ahead to fiscal 2025, Diageo anticipates continued challenges in the consumer environment but aims to strengthen business resilience and achieve long-term sustainable growth. The company expects the negative pressure on the organic operating margin to persist but plans to offset this through productivity and pricing strategies. Diageo also projects a tax rate of around 24% and a stable effective interest rate of 4.3%.

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