Shares climb as Diageo bets on turnaround

Diageo shares climbed more than 6% after the drinks giant posted resilient sales and a confident forecast under new leadership. Despite a sharp profit fall, investors welcomed signs of recovery and increased cost savings.

Diageo’s shares jumped by more than 6% in early trading after announcing its annual results and presenting a more optimistic view of the future.

Net sales of US$20.2 billion were down 0.1%, but organic net sales rose by 1.7%, driven almost equally by volume and pricing. That eclipsed analysts’ forecasts of 1.4% growth. The company said it had gained or held its market share of net sales in 65% of measured markets, including the all-important United States, which accounts for 39% of its business.

Its annual operating profit declined 27.8% to US$4.3bn, compared to analyst estimates of a 10% fall, on the back of “exceptional impairment and restructuring costs”. Consequently, Diageo is recommending to shareholders that its dividend will be held at last year’s level, the first time this century that it will not be increased.

Leadership change and strategic focus

Nik Jhangiani, the interim CEO, who replaced Debra Crew last month, said he was “encouraged by areas of progress”.

“We have delivered what we said we would deliver,” he said of the company’s full-year performance, adding, “There is clearly much more to do across our broader portfolio and brands.”

Analysts were encouraged that the Accelerate programme is “progressing well” and Jhangiani said that the cost savings target of US$500m in the next three years was being increased by US$125m and that the company’s free cash flow would grow to US$3 billion in the current financial year.

As evidence of its focus on accelerating growth, Diageo pointed out that in the past 12 months, Don Julio Tequila had grown by double digits in all regions and gained share in 90% of measured markets. Despite the supply shortages in the UK, Guinness had also achieved double-digit growth, while Johnnie Walker had increased its share of the international market for scotch.

Tariff impact and macro pressures

Like all other major drinks groups, Diageo said it was wrestling against “macroeconomic uncertainty”, but Jhangiani said he expects this year’s organic sales growth to remain comparable and that organic operating profit growth would be in the mid single digits, allowing for the impact of President Trump’s tariffs.

The company calculated that it could cost it about US$200m in a full year, but that the mitigations it had already put in place would probably halve that sum.

Jhangiani gave no information on possible disposals, but he confirmed strong interest from potential buyers. The Royal Challengers Bangalore cricket franchise or the controlling stake in East African Breweries have been mooted as possible non-core businesses that Diageo may be looking to offload.

US gains driven by Tequila

Reported sales in the US grew by 0.8% despite volumes falling by a similar amount. The outstanding category was tequila, which grew by 16.9% led by Don Julio, which increased its net sales by 41.9%. On the downside, Johnnie Walker’s 10.6% fall in sales reflected the overall weakness of scotch in the US.

Jhangiani revealed that he expected Diageo’s US sales performance to be lifted by putting “more feet on the ground”, a strategy to help customers boost their businesses and reinforce Diageo as the supplier of choice.

This was a tactic he intends to roll out in other markets, especially the UK.

Mixed regional picture

In Europe, net sales grew by 0.4%, with Great Britain increasing net sales by 3.5% despite the Guinness shortages. In a move to improve performance, Diageo is also separating its teams in Italy, Spain and France to allow them to concentrate their focus.

Net sales in the Asia Pacific region fell by 4.8% as economic woes continued to hit consumer confidence in China, especially and travel retail continued to suffer. India, however, put on 7.1% and Jhangiani said that when the recent trade deal with India comes into effect, Diageo will be able to lower prices to increase demand.

Healthier options and future leadership

Jhangiani said that Diageo was moving rapidly to meet market demands for healthier drinks through innovation, further extension of its RTD range and the provision of more affordable sizes. He rejected, however, that Gen Z was drinking less.

Asked when Diageo would name a permanent replacement for Crew, he hinted that the board would probably choose her successor as CEO “by October”. He is seen by many as the front-runner for the job.

Related news

Diageo pauses maltings at Roseisle as whisky sector faces deepening strain

Diageo appoints former Tesco boss Sir Dave Lewis as new CEO

Diageo’s ‘Fancy That!’ campaign champions smarter drinking choices