Diageo Warns Weak Spirits Demand Will Continue After Americas Sales Drop — 2nd Update

By Andrea Figueras

Spirits maker Diageo expects demand to remain soft after consumers in North and Latin America pulled back spending on alcohol in its last fiscal year, weighing on sales.

The U.K. company, which counts Johnnie Walker, Guinness and Smirnoff among its brands, booked net sales of $20.27 billion for the year ended June 30, down 1.4% on year. Analysts had forecast sales of $20.24 billion, according to a poll compiled by Visible Alpha.

Diageo said organic net sales in North America fell 2.5% due to weak demand and the negative effect of inventory replenishment the previous year. Like rivals, Diageo is grappling with more subdued demand for alcohol after a surge in sales during the pandemic led to high inventories, particularly in the U.S.

"North America is experiencing consumer weakness, which is not an isolated issue but rather one observed across several countries," said Chris Beckett, head of equity research at Quilter Cheviot.

Diageo said it was also facing fast-changing consumer sentiment and high inventory levels in the Latin American and Caribbean region.

In China, another key market for beverage companies, an anti-dumping probe launched by the Chinese government in January into brandy imported by the European Union raised concerns among investors and analysts. Despite challenging economic conditions, net sales grew 12% in Greater China, boosted by strong growth in Baijiu, also known as Chinese white spirit.

Diageo's operating profit in fiscal 2024 climbed 8% on year to $6 billion, though net profit fell to $3.87 billion from $4.45 billion.

Shares plunged on the news, leading FTSE 100 fallers. Shares traded 7.8% lower at 2,349.0 pence at 1006 GMT. Since the start of 2024, shares are down 18%.

"We expected these results to be grim, and so they were," RBC Capital Markets analysts wrote in a note to clients.

Now into its new fiscal year, Diageo said the consumer environment continues to be challenging.

The company aims to get back into its medium-term guidance range of organic net sales growth between 5% and 7% but expects negative pressure on its organic operating margin to persist into fiscal 2025.

RBC Capital Markets analysts said there seems to be little sign of expected improvement next year, which isn't reassuring, given remarks from other companies that U.S. consumer confidence is under pressure.

"Guidance remains vague and doesn't provide much optimism for a swift turnaround," Quilter Cheviot's Beckett said, though the long-term outlook for the industry remains positive.

Diageo earlier this year said finance chief Lavanya Chandrashekar would step down after three years in the role. Nik Jhangiani, currently CFO at Coca-Cola Europacific Partners, will replace Chandrashekar this fall. The change was welcomed by analysts, who noted that the bottling company had performed well since Jhangiani became its CFO in 2013.

On top of the CFO change, Diageo said in June that it would sell its stake in subsidiary Guinness Nigeria to Tolaram as part of a shift in its business model in the country. Analysts saw the shift in Nigeria as positive and consistent with the company's prior moves in the African market.

Last year, Diageo decided to establish a wholly owned spirits-focused business to manage the importation and distribution of its international premium spirits portfolio in western and central Africa, with Nigeria as one of the hubs.

Write to Andrea Figueras at andrea.figueras@wsj.com

(END) Dow Jones Newswires

July 30, 2024 06:23 ET (10:23 GMT)

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