Shares in Diageo (DGE) slipped 5.4% lower to £27.26 on Tuesday after the alcoholic drinks giant served up a worse than expected drop in annual organic sales.

The Johnnie Walker-to-Smirnoff maker’s second half was hammered by the economic deep-freeze caused by COVID-19.

And investors were left nursing a hangover as Diageo took a pandemic-induced £1.3 billion write-down and reported a worse than expected slump in second quarter organic sales as well as a substantial plunge in yearly cash flow.

SALES MISS

Results for the year to June from the Captain Morgan-to-Guinness brands owner revealed organic sales were down 8.4%, missing market expectations by 0.9%.

‘Fiscal 20 was a year of two halves: after good, consistent performance in the first half of fiscal 20, the outbreak of COVID-19 presented significant challenges for our business, impacting the full year performance,’ explained chief executive Ivan Menezes.

Thankfully for the globe’s largest distiller, North America performed surprisingly well, although Diageo suffered organic sales declines in all other regions with so many bars, hotels and restaurants closed for much of the second half and social life on hold due to the pandemic.

WHAT THE EXPERTS ARE SAYING

Chris Beckett, Head of Equity Research at Quilter Cheviot, explained that Diageo ‘exhibited greater operation gearing than analyst expectations’, which meant overall operating profit fell 14.4%, slightly behind expectations.

However, Diageo did maintain the final dividend at 42.47p, bringing the full year dividend up 2% to 69.88p and demonstrating management’s confidence in a future earnings recovery.

Russ Mould, investment director at AJ Bell, commented: ‘People may have enjoyed the distraction of a drink at home amid the difficult times of the last few months but this wasn’t nearly enough to compensate for the hit associated with sales in pubs, restaurants and bars or at big sporting events or music festivals.

‘And with guidance for debt to remain at elevated levels, the company may struggle to take advantage of any opportunities to acquire quality assets for bargain prices. Which could have been one of the silver linings of the crisis.’

Mould added: ‘There is also still no guidance on how the company will perform in the current financial year. Understandably predicting what will happen in the coming months is extremely difficult and firms do not want to make themselves a hostage to fortune.’

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Issue Date: 04 Aug 2020