Diageo Plc, the world’s biggest distiller, reported first-half revenue and profit that missed analysts’ estimates as growth in North America failed to offset sluggish demand in Europe.
Organic sales, which exclude acquisitions and currency swings, gained 4 per cent, the London-based company said in a statement. That missed the 4.5 per cent median estimate of 11 analysts surveyed by Bloomberg News. So-called organic operating profit rose 2 per cent, missing a 6.5 per cent median estimate.
“Europe was much worse than our expectations on the bottom-line,” as operating profit dropped 9 per cent in the region, analysts at Sanford C Bernstein including Trevor Stirling wrote today. “Diageo has not adjusted their cost base to reflect the falling sales.”
The region was “a bit more challenging than we had anticipated,” in the second quarter, Chief Financial Officer Deirdre Mahlan said today. Sales fell 3 per cent in the region, as drinkers in Spain and Greece shunned Johnnie Walker and the Irish consumed less Guinness amid austerity measures. In North America, Diageo is concentrating on marketing its brands over cutting prices after demand returned, she said.
The stock dropped as much as 63 pence, or 5 per cent, to 1,190 pence and traded at 1,212 pence as of 10.06 am in London. The intraday decline is the biggest since March 19, 2009. The stock has added 2.3 per cent this year, giving it a market capitalisation of £30.5 billion ($41.6 billion).
Unchanged guidance
The company today repeated that it targeted growth of more than the 2 per cent organic operating profit increase reported last year. Analysts, including Jason DeRise at UBS AG, had anticipated that Diageo would raise its guidance for organic operating profit growth.
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The “unchanged, and uninspiring guidance” from Diageo is a “missed opportunity,” James Edwardes-Jones, an analyst at Espirito Santo in London, wrote today. He cut his recommendation on the stock to “hold” from “buy”.
The Smirnoff maker wanted to maintain its ability to invest in marketing or acquisitions, the CFO said. Diageo aims to add businesses where growth is the fastest, though she didn’t rule out acquisitions in developed markets. The company would look at Fortune Brands Inc’s spirits unit if it became available, she said. There are brands at the business, which makes Jim Beam, that Diageo would be interested in, she said.
Fortune last year announced plans to split into three and focus on its distilled spirits unit after activist investor William Ackman built up a stake.
European conditions
Economic conditions in Europe, where governments are imposing austerity programs and consumers are reining in spending, hurt sales, Diageo said. In the UK, higher growth in wine and lower prices for spirits hit profitability. Beer revenue in Europe dropped 4 per cent.
Sales at the North American unit returned to growth in the first half after consumers bought fewer products and traded down to cheaper drinks last year. Organic sales in the region rose 3 per cent, beating the 2.5 per cent increase estimated by analysts.