Johnnie Walker whisky-to-Smirnoff vodka maker Diageo (DGE) dampens investors' spirits with an emerging markets-driven top-line miss. The premium drinks giant dips 6.3% to £17.91 as half-year figures show sales growth slowing from 2.2% in the first quarter to 1.4% in the second.

Web chart - Diageo - Jan 2014


Chief executive officer Ivan Menezes, who took over from long-standing boss Paul Walsh last summer, warns slowing emerging markets growth has crimped progress at the 'expensive defensive' behind booze brands ranging from Baileys to Captain Morgan and Guinness.


Emerging markets sales edged up 1.3% in the half ended 31 December, with Chinese progress pegged back by government anti-extravagance measures brought in by the president, Xi Jinping and discounting by competitors in the high-end baijiu spirits category. The £47.8 billion cap also cites weak beer sales in Nigeria, where consumers have been trading down to value tipples, as another factor behind its recent woes.


Like-for-like sales growth of 1.8% for the half followed 2.2% growth in the first quarter, thereby implying anaemic 1.4% sales progress in the second quarter. The three-month result was well south of the 3.9% consensus estimate. Furthermore, the FTSE 100 drinks giant's modest 3% operating profits increase to £2.06 billion has clearly left the market cold.


Asia Pacific shows a 6% like-for-like sales decline for the half year. This implies a 12.6% second quarter decline, dramatically-disappointing given that broker Liberum Capital was looking for 1.4% growth. Elsewhere, second quarter growth slowed in an Africa, Eastern Europe and Turkey region accounting for 20% of Diageo's sales and the pace of growth has decelerated in Latin America and the Caribbean. Reassurance was provided by North America, where first-half sales growth of 4.6% benefited from strong demand for premium spirits such as Johnnie Walker and Crown Royal and an improving trend in Western Europe.


While offering an astute play on Shares' favoured themes of brand strength, pricing power and copious free cash flow, slowing emerging markets growth is weighing on sentiment towards Diageo. Deceleration in developing economies is particularly problematic for the consumer staple, which has established a platform for growth in the developing world through M&A deals everywhere from China and India to Turkey, Brazil and Africa.


Although Diageo has suffered a de-rating, investors shouldn't forget its myriad strengths. These include sheer scale, expanding global distribution as well as scope to profit from premiumization long-term, as aspirational consumers move up the scale into high-end beers and spirits. Moreover, the business still generated £326 million free cash flow in the half, underpinning a 9% dividend hike to 19.7p.

Issue Date: 30 Jan 2014