26th Jan 2023 20:14
(Alliance News) - Diageo PLC finished at the bottom of the FTSE 100 on Thursday, despite reporting a double-digit profit rise in the first half of its financial year, investors were disappointed about the firm's outlook.
Diageo is a London-based brewer and distiller with brands including Baileys, Tanqueray, Johnnie Walker, Smirnoff and Captain Morgan.
The stock closed 5.7% lower at 3,465.00 pence on Thursday in London. Over the past 12-months, Diageo was down 7.2%.
Diageo said pretax profit in the six months to December 31 increased 12% to GBP3.06 billion versus GBP2.72 billion a year earlier.
Net sales rose 18% year-on-year to GBP9.42 billion from GBP7.96 billion. Diageo noted that organic growth was 10%, rising in all markets except in eastern Europe, which was hit by the company shutting down its operations in Russia.
Diageo back in June announced it would wind down operations in Russia following the country's invasion of neighbour Ukraine in February 2022.
interactive investor's Victoria Scholar said that, amid the cost-of-living crisis with a weakening consumer backdrop, the drinks firm was "defying the macroeconomic headwinds", proving that demand remains largely robust.
"This is partly thanks to the diversification across its drinks portfolio, which continues to expand after the recent acquisition of Don Papa Rum," she explained.
Diageo recently bought Don Papa Rum, a dark rum from the Philippines, for an initial payment of EUR260 million in January.
"Price increases have also supported revenue, however, these have been putting pressure on the hospitality sector, which is already struggling with inflationary pressures from rising energy, labour, drinks and food prices," Scholar added.
However, for Susannah Streeter at Hargreaves Lansdown, it was "glass half empty time" for Diageo as though the firm poured out some "resilient" results, it disappointed in its outlook for "the all-important American market."
In North America, net sales grew by 19% year-on-year. This was mainly driven by a favourable impact from foreign exchange as the US dollar strengthened.
Organic sales in the region, meanwhile, grew by just 3% compared to the strong double-digit growth in the same period a year prior.
It was this slowing growth in such a key market that sparked concern for investors, according to AJ Bell's Russ Mould, as "booze is supposed to be pretty recession resistant."
Looking ahead, Diageo reiterated its medium-term guidance, between the financial year 2023 and 2025, of organic net sales growth in the range of 5% to 7%.
However, it said it expects organic net sales growth in Europe to moderate in the second half of its current financial year to June 30.
Further, in the Asia Pacific, Latin America & Caribbean and African regions, it anticipates growth to slow due to "strong" sales during financial 2022.
Despite the caution, ii's Scholar remained upbeat on Diageo's future.
"Diageo has been strategically shifting towards premiumisation in recent years, with a focus on quality over quantity, as consumers substitute to higher priced brands, a trend that took flight during the pandemic," she said.
"Plus it has been growing in the low and no-alcohol segment of the market, appealing to increasingly health-conscious younger consumers who still want to enjoy the ritual of a drink without the hangover."
This, Scholar suggested, would keep Diageo on good footing as its year progresses, particularly amid a "long overdue" economic reopening post-Covid for China which she argues will release pent-up demand from the world's second-largest economy.
Streeter was more cautious: "[Diageo is] hopeful that wealthier Chinese consumers will return to its brands once the Covid nightmare turns into bad dreams, but there are no guarantees business will snap back to previous levels."
By Heather Rydings, Alliance News senior economics reporter
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