Diageo shares were sharply lower on Tuesday after the alcohol giant confirmed a poor year for sales in its preliminary results for the year ended 30th June.
Diageo has reported a 1.4% decline in net sales to $20.3 billion for the full-year period as sales in Latin America and the Caribbean region tanked. Poor sales translated to a 4% drop in organic volumes.
Despite these challenges, the company managed to boost its reported operating profit by 8.2%, with the operating profit margin expanding by 262 basis points. However, this did little to encourage investors and shares were down 8.5% at the time of writing on Tuesday.
The most significant factor contributing to Diageo’s struggles was a sharp 21.1% decline in sales within the Latin America and Caribbean (LAC) region. This precipitous drop in LAC overshadowed positive performance in other markets, resulting in an overall organic net sales decline of 0.6%. The company’s volume decreased by 3.5%, outweighing a 2.9 percentage point improvement in price and mix.
Excluding the LAC region, Diageo’s performance paints a different picture. Organic net sales outside LAC grew by 1.8%, driven by a robust 3.9 percentage point improvement in price and mix. This growth was partially offset by a 2.1% volume decline. Notably, while North America experienced a 2.5% decrease in organic net sales, this was more than compensated for by growth in Africa, Asia Pacific, and Europe.
“In what is perhaps a reality check from the pandemic boom for Diageo, they have posted their first yearly sales decline since 2020, which is in fact worse than analysts initially feared. A fancy bottle of whiskey for locked down consumers with a little extra cash in their pocket was the perfect treat at the time but now it seems that increased competition and price consciousness have hit Diageo’s bottom line,” said Adam Vettese, Market Analyst at eToro.
“The firm issued a profit warning due to inventory issues in the key Latin America region as well as loss of market share in the US. It is fair to say that times are tougher now, with consumers facing more pressure on their own finances and as such luxury drinks are one of the first casualties of the household budget. This is particularly so in regions such as Latin America, where income is generally lower and there are cheaper, local alternatives on offer.”
Despite the challenges, Diageo maintained or grew its market share in over 75% of its measured markets, including the crucial US market. The company also demonstrated financial resilience, with net cash flow from operating activities increasing by $0.5 billion to $4.1 billion and free cash flow rising by $0.4 billion to $2.6 billion.
In a show of confidence, Diageo increased its recommended full-year dividend by 5% to 103.48 cents per share.