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Diageo shares fall despite US tariff pause
President Trump’s decision to pause for a month the imposition of 25% tariffs on imports from the US and Mexico failed to lift the gloom surrounding Diageo’s share price, which shed a further 3.5% this morning.
The group’s half year results to the end of December failed to impress the stock market because it scrapped giving medium-term performance guidance, which had stood at 5% to 7% for organic sales growth.
Chief executive Crew blamed uncertainty generated by the threat of tariffs, continued global uncertainties and weakness in consumer demand.
Diageo is the biggest spirits producer shipping to the US from Mexico and Canada with brands such as Don Julio Tequila and Crown Royal Whiskey, which account for more than 40% of its US sales and were its most dynamic performers there in the half year.
Chief financial officer Nik Jhangiani said that the implementation of US tariffs was expected, and Diageo “was taking and would continue to implement a number of actions to mitigate their impact.
“They include pricing strategies, inventory management, supply chain adaptation and reallocation of investment”.
Actions on price
If the tariffs eventually went ahead, he was confident that Diageo could absorb about 40% of their impact before it needed to take any actions on price.
Sales in the six months to the end of December fell 0.6% to US$10.9 billion but Crew said that demonstrated “positive momentum” since organic net sales rose by 1% with growth in four out five regions including North America.
“Our performance demonstrates that we’re making meaningful progress”, she said.
The destocking programme in Latin America which triggered the shock profit warning 14 months ago had been resolved and Crew underlined her belief that because of its “ability to outperform the market” Diageo would continue to gain share within the total beverage alcohol market.”
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Diageo said it grew or held total market share in 65% of total net sales value in measured markets, including in the US, but earnings per share fell by 9.6% to 97.7 cents largely due to a significantly lower contribution from Moët Hennessy, LVMH’s underperforming Champagne and Cognac division, in which in which Diageo has a 34% stake.
Under pressure
In the critical North American market, Diageo increased its market share despite the continued softness in demand for spirits.
“The US consumer remains cautious”, Crew said, “with [the cost of] grocery baskets still at a 30-year high. “But we’re seeing a gradual Improvement in consumer sentiment and wage and job growth.”
“Individual household wallets are still under pressure with mounting credit card debt in a high interest rate environment. Within this backdrop TBA has been slightly declining with the US spirits market modestly better but remaining flat.”
“With ongoing economic pressures. We have seen that consumers have opted for smaller pack sizes. Four out of 10 of our largest share gainers have been in these smaller formats. Importantly, these formats to ensure that consumers stayed with our premium brands”, she said.
Guinness
Among brands, Diageo’s star performer was Guinness.
“Demand for Guinness in Great Britain has surpassed our most optimistic expectations, Crew said. “One in 10 pints sold is now a Guinness and it’s the number one beer brand.”
“And its success goes beyond its heartland; it’s growing fast in Australia, and in Greater China it was the fastest growing major imported beer in the on premise.
“In the US it is expanding outside of its traditional home in the Irish pub, gaining distribution in casual restaurants, sports bars and neighbourhood bars.”
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