Diageo sales beat expectations

Shares in Diageo jumped by 2% in early trading in London when the world’s largest premium beverage alcohol announced its results for the year to the end of June.

It reported better-than-expected full-year operating profits and sales as price increases and customers trading up the quality spectrum to more expensive brands helped offset falling volumes.

The group achieved net sales of £17.1 billion, up by 10.7%, primarily reflecting strong organic net sales growth and favourable foreign exchange movements but volumes fell by 7.4%.

Organic net sales grew by 6.5%, marginally beating analyst forecasts for a 6.4% increase. The price/mix increase of 7.3 percentage points reflected a high single-digit contribution from price and premiumisation. Reported volume declined by 7.4%, and organic volume declined by 0.8%.

Diageo said its increased organic net sales grew by 6.5% reflecting 7.3 percentage points of gains from higher prices and a more premium mix and a decline in organic sales volumes of just 0.8%.

Organic operating profit rose 7%, more than the 6.3% expected by analysts.

Diageo is increasing its final dividend by 5% to 49.17 pence per share and has announced a further $US1bn share buyback programme in addition to the £4.5 billion already returned to shareholders over past few years. It generated a further £3bn in net cash flow, a fall of £0.9 billion reflecting further capital expenditure and investment in brands.

Resilient

New chief executive Debra Crew, who took over a month ago following the death of Sir Ivan Menezes, said: “We have delivered strong fiscal 23 full-year results, with organic net sales growth of 6% and organic operating profit growth of 7%, both within our medium-term guidance.

“We expanded organic operating margin by 15 basis points in a challenging cost environment while continuing to invest in the business. These results demonstrate Diageo’s ability to consistently deliver resilient performance, even in challenging macro environments.”

“We drove double-digit organic net sales growth in scotch, tequila, and Guinness, with our premium-plus brands contributing 57% of overall organic net sales growth,” she said.

“We delivered strong growth in four of our five regions, with Europe and Asia Pacific growing double-digit.

“North America delivered stable performance as the US spirits industry continued to normalise post-pandemic, and we lapped strong comparators, particularly in the second half of fiscal 23.

“Globally, we gained or held share in over 70% of total net sales value in our measured markets in fiscal 23.”

North America

The slowdown in North America (where the group derives 39% of its sales) may cause some concern.

Reported net sales in the region grew by 11%, primarily driven by a favourable foreign exchange impact from the strengthening US dollar but organic net sales for the year were flat as growth in Canada and Diageo Beer Company USA were offset by a decline in spirits.

Strong price/mix growth was offset by a decline in volumes.

Major rivals such as LVMH and Remy Cointreau recently reported a significant recent slowing in the US market as it normalises post-pandemic and consumers adjust to the impact of inflation.

A bright spot in the US was Diageo’s performance in Tequila with net sales 15% ahead (Casamigos +14% and Don Julio +13%). But net sales of vodka, Johnnie Walker Scotch and Crown Royal fell by 7%, 13% and 6% respectively.

In Europe, both reported and organic net sales were 11% ahead with net sales in Britain, where Guinness was a strong performer, up 7% up on 2022. In Asia, organic net sales grew by 13% with all markets except Greater China showing with strong double-digit growth. Net sales in India were 17% ahead.

Looking to the 2024 fiscal year, Crew said: “I expect operating environment challenges to persist, with continued cost pressure and ongoing geopolitical and macroeconomic uncertainty.”

The company maintained its medium term guidance of annual organic net sales growth of 5% to 7% and organic operating profit rising between 6% and 9%.

Crew concluded: “My near-term opportunities to drive the business focus on bolder and faster innovation, stepping up operational excellence to meet consumers' evolving tastes and preferences while driving scotch, tequila and Guinness.

“Fiscal 24 marks the start of Diageo’s next stage of evolution. I believe total beverage alcohol is an attractive sector underpinned by strong consumer fundamentals, including population growth, increased spirits penetration, and resilience in premiumisation globally.

“I see a long runway of future growth opportunities for Diageo to go after with our winning strategy. And, I firmly believe we have an advantaged portfolio to capitalise on, to drive sustainable long-term growth and generate value for shareholders.”