Diageo shares rose in early trade on Monday before falling back after the drinks giant announced promising fiscal Q3 results that provided a welcome reprieve from warnings on slowing sales that dominated trading updates in recent periods.
Diageo’s organic net sales climbed 5.9% to $4.4 billion, driven by volume growth of 2.8% and positive price/mix of 3.1%, although reported net sales increased by just 2.9% due to unfavourable foreign exchange movements and recent disposals.
Management noted that favourable phasing contributed approximately 4% to the quarter’s organic net sales growth, primarily in North America. This timing advantage is expected to reverse in the fourth quarter.
All regions delivered positive price/mix except Asia Pacific, where continued consumer downtrading and adverse market mix negatively impacted performance.
Diageo has reiterated its full-year fiscal 2025 guidance for both organic net sales and operating profit. The company expects improvement in organic net sales growth in the second half compared to the first half of fiscal 2025, but it still sees operating profits falling as tariffs impact trading.
The company said the impact of tariffs is estimated at approximately $150 million on an annualised basis, assuming there are no increases from the current rates. Management expects to mitigate around half of this impact on operating profit, citing their “long track record of managing international tariffs”.
Investors will welcome Diageo’s assessment of the impact of tariffs, given that alcohol has been one of the main tariff battlegrounds in Donald Trump’s trade war.
Diageo’s launch of the first phase of its “Accelerate” programme to create a more agile operating model will also encourage investors. The group expects the programme to help deliver approximately $3 billion in free cash flow annually from fiscal 2026.
Diageo shares were 0.6% lower at the time of writing.
“Diageo managed to serve up solid growth in the first quarter, with sales benefiting from a good mix of both price and volume growth. Diageo has a world-class cocktail of brands, including Guinness, Smirnoff, Johnny Walker, and Tanqueray,” said Aarin Chiekrie, equity analyst, Hargreaves Lansdown.
“These powerhouse brands have helped all regions manage to squeeze through price hikes except Asia Pacific, which continued to see consumers downtrading to cheaper brands, which weighed on sales.”
The current tariff regime is expected to cost around $150mn annually. Diageo expects to be able to offset around half of this through streamlining operations and will likely lean on price hikes to help offset the rest. But this will take a bit of time to enact. Alongside a soft first-half performance, full-year organic operating profits are expected to decline slightly. Zooming out, the picture is starting to look a touch better than it has for some time. Sales to China are largely unaffected by tariffs, Latin America and the Caribbean are lapping some weak comparable figures, and there are early signs that the industry is recovering from its cyclical hangover.”