- Organic sales improvement
- Outlook clouded by tariffs
- Medium-term guidance withdrawn
Alcoholic drinks giant Diageo (DGE) served up a return to organic growth for the first half as a palate-pleasing performance from the iconic Guinness brand, a shoot-the-lights-out showing from tequila label Don Julio and price increases helped to offset a modest decline in volumes.
There was also relief as Diageo left the half-time dividend unchanged at 40.5 cents, allaying concerns of a potential cut.
So why then, did shares in the Johnnie Walker whisky-to-Smirnoff vodka maker drop 4% to a five-year low of £22.73?
Well, demand challenges persist, with drinkers continuing to grapple with inflationary pressures, but Donald Trump’s tariffs were predominantly to blame.
The US President’s 25% tariffs on Canadian and Mexican imports prompted the spirits giant to remove medium-term guidance of 5% to 7% organic sales growth, admittedly an ambitious target set during the pandemic-induced demand boom.
FORWARD GUIDANCE PULLED
Diageo withdrew medium-term guidance due to ‘the current macroeconomic and geopolitical uncertainty in many of our key markets impacting the pace of recovery’, though the FTSE 100 spirits leader said it remains ‘confident of favourable industry fundamentals and our ability to outperform’.
Under pressure to turn Diageo around, CEO Debra Crew explained the company has ‘anticipated and planned for a number of potential scenarios regarding tariffs in recent months. The confirmation at the weekend of the implementation of tariffs in the US, whilst anticipated, could very well impact this building momentum. It also adds further complexity in our ability to provide updated forward guidance given this is a new and dynamic situation.’
POSITIVES & NEGATIVES
Results for the half to 31 December 2024 from Diageo showed a stabilisation in performance. Organic sales returned to growth, bubbling up $101 million or 1% despite a 0.2% volume decline, with the results containing positives and negatives across Diageo’s array of geographies, brands and categories.
In North America, Diageo delivered positive organic growth with a boost from the tasty momentum in Don Julio and Crown Royal, while Latin America, where Diageo recently encountered inventory issues, returned to growth.
A brand with growing global momentum, Guinness delivered double-digit growth for an eighth consecutive half and sales of Don Julio tequila surged, though the Johnnie Walker, Smirnoff, Casamigos and Capitain Morgan brands suffered sales declines.
EXPERT VIEWS
‘Overall, we view these results as solid,’ said Quilter Cheviot’s Chris Beckett. ‘The spirits market has faced challenges over the past few years, but Diageo is well-positioned. We do not believe there has been a fundamental decline in demand for high-quality spirits brands; rather, there has been a temporary soft patch that will recover.’
Beckett continued: ‘Rumours of a Guinness spin-off seem to have been dismissed. Diageo owns 34% of Moet Hennessy, part of LVMH (MC:EPA), and would like to acquire the remaining stake. However, this is only feasible if it sells Guinness, given its current balance sheet constraints. The sale of Moet Hennessy was denied in LVMH’s recent press conference, and we do not anticipate a sale of Guinness at this time.
‘Looking ahead, the second half is expected to be similar if tariffs are not imposed. While some mitigation is possible, tequila must come from Mexico and Canadian whisky from Canada, which could pose challenges.’
Russ Mould, investment director at AJ Bell, said if tariffs are imposed it will be ‘a test of Diageo’s pricing power to pass on these extra costs to consumers. The financial results themselves weren’t outstanding, even though group revenue came in slightly ahead of forecasts. The dividend was held flat, in a sign of the uncertain outlook and big spirits brands like Tanqueray, Gordon’s and Smirnoff sales all under pressure.
‘The outlier is Guinness which is having a good moment. This may only fuel speculation, so far dismissed by Diageo, about a spin-off or sale.’
Mould added: ‘One thing is for sure; CEO Debra Crew remains under pressure to come up with something to revive the group’s fortunes amid the threats posed by shifting drinking habits among younger generations and the impact on alcohol consumption of the adoption of weight-loss drugs.
‘Since taking the helm in July 2023, Crew has seen Diageo shares lose 30% of their value to trade close to pandemic lows.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.
