The stock has lost 30% of its value since January and 50% in three years. The spirits market, however upmarket it may be, has gone through difficult years. The pandemic slowed the pub culture for beer (16% of sales), inflation has weighed on entry-level products (37% of the portfolio), economic uncertainties in China have pushed consumption toward less extravagance, and new pricing pressures are expected to cost $200m per year.
Sales driven by volume
Despite this environment, Diageo is staying the course and adjusting its strategy. Sales reached $27.96bn, slightly above expectations and up from $27.89bn last year. Amongst encouraging signs, growth came from volumes, which rose 0.9%. For the coming fiscal year, the group is targeting similar organic growth (+1.7%) and a 5% increase in operating profit.
The diversified portfolio offset some underperformance: Don Julio jumped 38%, with double-digit growth in all regions; Guinness, which accounts for 25% of European sales, grew 13%. However, the flagship brand, Johnnie Walker whisky, declined by 5%.
A reinforced cost-cutting plan
The "Accelerate" program is expected to generate $625m in savings over three years, compared with the $500m initially expected. The plan should enable the company to generate cash flow of around $3bn per year. Free cash flow has already reached $2.74bn, compared with $2.33bn last year.
However, restructuring costs ($225m) and, above all, other exceptional expenses caused net profit to plunge 39% to $2.54bn.
Focus on 2030
Following the resignation of Debra Crew, the CFO will take over as interim CEO until the end of October, pending the appointment of a successor. Diageo still aims to achieve 6% of the global alcoholic beverage market by 2030, compared with 4.7% today.
The market recovery remains uncertain, but results close to consensus and a share price back to 2016 levels may revive interest in a stock that has been slowly tortured for several years. Especially since the valuation has not been this low for even longer.
Evolution of P/E
