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Diageo Plc.’s (DEO - Analyst Report) earnings in fiscal 2013 ended Jun 30, 2013, went up 11% year over year in local currency to 104.4 pence ($1.6* per share) from 94.2 pence ($1.5** per share) in the same period previous year.

Positive pricing, favorable mix in the emerging markets, volume growth in North America and Latin America, and tight cost control by management contributed to profit growth during the fiscal 2013.

On a reported basis, net revenue (i.e. total revenue excluding excise duties) increased 6% in local currency to £11.4 billion ($17.9 billion) in fiscal year 2013. On an organic basis, revenues increased 5%, while volume grew 1% from the prior-year level.

Diageo increased its marketing spending by 5% organically in fiscal 2013. Operating profit before exceptional items (excluding acquisitions and disposals) went up 8% year over year, on an organic basis.

During fiscal 2013, scotch was the most profitable category backed by the strong sales of Johnnie Walker. Diageo continued to enhance its wide portfolio of brands with innovations and massive product launches, particularly in the U.S. spirit market.

Segment Details

All the regions, except Europe, have delivered positive organic sales growth.

In North America, Diageo’s organic sales increased 5% in fiscal 2013, with a volume growth of 1% backed by positive price/mix and strong results in the U.S. spirits market. The shift in demand toward premium spirits led to strong sales of the premium brands of Diageo during the period. Marketing spending increased 7% in the region, primarily because of increased investment in strategic brands. Operating profit grew 10% organically in the year.

Beer and Ready to Drink suffered sales decline mainly due to increased competition and supply disruptions 

In Western Europe, organic sales fell 4% along with volume declines of 3% due to ongoing macroeconomic challenges. The company saw 9% decline in operating profit with an 8% decline in marketing spending. Marketing investment during the period was focused on the strategic brands like Captain Morgan, Tanqueray and Guinness.

Diageo has started reporting Africa, Eastern Europe and Turkey as a new geographical segment. This segment's organic sales increased 10% in the fiscal year, with 4% growth in volume backed by strong spirits sales gain in the region. Marketing spending increased 14% in the region, particularly on well established brands. Operating profit increased 14%.

The Latin America and Caribbean region delivered a strong performance in the year, with organic sales growth of 15% and volume growth of 4% backed by strong growth in Venezuela and Mexico, partially offset by a slowdown in Brazil. The company also increased its marketing spending by 12% to enhance the brand equities in its reserve brands. It will also invest part of it in enhancing strategic brands like Johnnie Walker Red Label, Black&White and White Horse. Despite the increasing costs, operating profit grew 28% in the year.

In the Asia Pacific region, sales climbed 3% organically with a volume growth of 1% mostly due to difficult conditions in Korea. Marketing spending jumped 8% mainly on reserve brands and operating profit grew 24% on an organic basis backed by positive pricing. Strong results in Taiwan, Japan, Australia and the Middle East were partially offset by reduced spending in China.

The company is increasing marketing investment in all the geographical segments and is focusing more on its premium brands. The strategy of converting to high-margin high-priced products is helping the company improve its margins.

Diageo is expanding fast into the emerging markets. Diageo holds 27.4% ownership in United Spirits Limited, a leading spirit company of India.

Currently, Diageo Plc carries a Zacks Rank #4 (Sell). Other consumer staples companies which are better placed and are worth considering are Tyson Foods Inc. (TSN - Analyst Report), Green Mountain Coffee Roasters Inc. (GMCR - Analyst Report) and Nash Finch Company . While Green Mountain and Nash Finch hold a Zacks #1 (Strong Buy), Tsingtao Brewery carries a Zacks Rank #2 (Buy).

*£1=$1.56908 (average price of the year ended Jun 30, 2013).

**£1=$1.58494 (average price of the year ended Jun 30, 2012).

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