Drinks giant Diageo (DGE) had investors popping corks after Q3 organic sales growth surprised positively. Instead of a 2.3% decline in net revenue for the three months to March, the firm reported a 0.3% increase.
Clear improvement
Analysts’ growth forecasts for the period varied from -4.2% to +0.5%, putting the firm’s performance towards the top end of the range. Better still, quarterly net sales of $4.48 billion were above both the consensus of $4.26 billion and the top forecast of $4.39 billion.
Encouragingly, growth was driven by better volumes and a better combination of price and product mix. Volumes were up 0.4% against -0.9% in H1, while price/mix was down 0.1% against -1.9% in H1.
As in the first half, North American net sales fell by high single digits reflecting continued weakness in the spirits market. However, sales in Europe, LAC (Latin America & Caribbean) and Africa were all up strongly.
Europe, which represents around 25% of sales, posted organic growth of 8.8% with volumes up 6.3% and prices up 2.6%. LAC and Africa, which together account for 20% of sales, posted organic growth of 16.2% and 17.1% respectively. Both markets enjoyed strong volume growth, with LAC also experiencing mid single digit price growth.
Asia Pacific sales, which were particularly weak in H1, were only down 0.8% thanks to a recovery in prices. While Chinese wine and spirit sales were still down, international premium spirit brands were more resilient.
New CEO Dave Lewis declared himself ‘pleased with growth across Europe, LAC and Africa’, but admitted North America remained a challenge. ‘Market conditions are soft and our offer needs to be more competitive’, said Lewis, adding actions were already under way.
Diageo has been out of favour with investors for the last five years, and there have been quite a few false dawns. However, with the shares trading back 2012 levels and a new CEO it feels as though the time is right to take another look.
LAC, which was the problem area not long ago and hastened the exit of former boss Debra Crew, seems to have been addressed. The next challenge is North America, which represents the biggest chunk of the group’s revenue.
It won’t be an instant fix, as US disposable incomes are under pressure plus trends in consumption have changed. With ‘Drastic Dave’ in charge, though, we can well believe actions are already under way.
Investors should also be encouraged by the firm sticking to the FY guidance it issued with its H1 results. That includes substantial cost savings and a target of $3 billion of free cash flow.
Read the press release here:
https://www.diageo.com/en/investors
