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Diageo plc (DEO - Free Report) reported interim results for the first half of fiscal 2024, ended Dec 31, 2023, wherein pre-exceptional earnings per share declined 7.1% year over year to $1.081. This was backed by soft sales, lower organic operating profit and higher finance charges, offset by reduced taxes, higher income from associates and joint ventures, and the impacts of share buybacks.
On a reported basis, net sales declined 1.4% year over year, driven by unfavorable currency impacts and an organic sales decline. Organic net sales were down 0.6% year over year due to a dip in Latin America and the Caribbean (“LAC”). The decline in LAC was driven by a 23.5% decrease in organic net sales due to lower consumption and reduced consumer demand from macroeconomic pressures in the region.
Excluding LAC, net sales grew 0.7% and organic net sales grew 2.5%, driven by strong growth in Europe, Asia Pacific and Africa, offset by a decline in North America.
The company notes that it is on track to deliver on its medium-term guidance for fiscal 2023-2025, wherein it targets organic sales growth of 5-7% and organic operating profit growth of 6-9%.
Shares of the Zacks Rank #3 (Hold) company have declined 6.4% in the past six months against the industry’s growth of 2.8%.
Image Source: Zacks Investment Research
1H24 Highlights
Organic volume declined 5.2% year over year. Price/mix grew 4.6% year over year, driven by growth across all regions, except for LAC. Price contribution to organic net sales was in the low to mid-single digits, driven by price increases, which helped mitigate the impacts of cost inflation and protect margins.
In North America, Diageo’s largest market, sales declined 2% year over year on both reported and organic basis due to weaker organic performances in U.S. Spirits and Canada, partially offset by growth from Diageo Beer Company. Additionally, net sales declined 12% in Africa and 18% in LAC. On a year-over-year basis, DEO witnessed net sales growth of 10% in Europe and 2% in the Asia Pacific.
The reported operating profit declined 11.1% year over year due to lower organic operating profit and the positive impacts of currency rates. The reported operating margin contracted 329 basis points (bps) on a lower organic operating margin and negative impacts of exceptional operating items.
Organic operating profit fell 5.4% year over year, with the organic operating margin contracting 167 bps due to weakness in LAC. Excluding LAC, the organic operating margin declined 53 bps, driven by higher marketing expenses, offset by the favorable impacts of other operating items and a positive gross margin.
The company earned an additional $335 million of productivity cost savings in cost of goods, marketing and overheads in the first half of fiscal 2024. It remains on track to surpass its three-year productivity savings target of $1.5 billion by the end of fiscal 2024.
Financials
At the end of the first half of fiscal 2024, Diageo delivered net cash from operating activities of $2,146 million. DEO reported a strong free cash flow of $1,462 million, driven by disciplined working capital management and the positive impacts of lapping one-time cash tax payments from the prior year.
Diageo is committed to its disciplined approach to capital allocation, primarily to enhance its shareholder value. DEO increased the interim dividend 5% to 40.50 cents per share. This reflects its strong liquidity position and confidence in the long-term health of its business. In the first half of fiscal 2024, the company returned $0.5 billion to shareholders through share buybacks under its buyback plan to repurchase up to $1 billion in fiscal 2024.
For fiscal 2024, the company expects capital expenditure of $1.3-$1.5 billion. It anticipates cash flow to increase on an organic basis in the second half of fiscal 2024.
FY24 Outlook
The company expects the organic net sales growth rate in the second half of fiscal 2024 to steadily improve from the growth rate in the first half.
In North America, Diageo expects organic net sales to improve gradually in the second half of fiscal 2024. The company anticipates the macroeconomic pressures in LAC to persist in the second half of fiscal 2024, which is likely to continue impacting inventory levels. Consequently, DEO expects organic net sales in LAC to decline 10-20% in the second half of fiscal 2024 from the second half of fiscal 2023. However, the company expects to finish fiscal 2024 with a more appropriate level of inventory for the current consumer environment.
In Europe, Asia Pacific and Africa, Diageo anticipates continued net sales growth in the second half of fiscal 2024.
The company estimates the tax rate before pre-exceptional items to be 23% in fiscal 2024, driven by the profit mix.
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We highlighted three better-ranked companies in the Consumer Staples sector, namely The Boston Beer Company (SAM - Free Report) , The Coca-Cola Company (KO - Free Report) and Ingredion (INGR - Free Report) .
Boston Beer is one of the largest craft brewers in the United States. It presently flaunts a Zacks Rank #1 (Strong Buy). SAM has risen 8.1% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Boston Beer’s EPS for the current financial year suggests growth of 4% from the year-ago levels. SAM has a trailing four-quarter negative earnings surprise of 77.7%, on average.
Coca-Cola, a global beverage giant, presently has a Zacks Rank of 2 (Buy). KO has a trailing four-quarter earnings surprise of 5.1%, on average. KO shares have gained 6.1% in the past three months.
The Zacks Consensus Estimate for Coca-Cola’s sales and EPS for the current financial year suggests respective growth of 5.7% and 8.1% from the year-ago period’s reported figures.
Ingredion, an ingredients solutions provider specializing in nature-based sweeteners, starches and nutrition ingredients, presently has a Zacks Rank #2. INGR shares have rallied 17.4% in the past three months.
The Zacks Consensus Estimate for Ingredion’s sales and earnings for the current financial year suggests growth of 5% and 24.8%, respectively, from the year-ago period’s reported figure. INGR has an earnings surprise of 23.9% in the trailing four quarters, on average.
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Diageo (DEO) 1H24 Sales & Earnings Decline Y/Y, View Bleak
Diageo plc (DEO - Free Report) reported interim results for the first half of fiscal 2024, ended Dec 31, 2023, wherein pre-exceptional earnings per share declined 7.1% year over year to $1.081. This was backed by soft sales, lower organic operating profit and higher finance charges, offset by reduced taxes, higher income from associates and joint ventures, and the impacts of share buybacks.
On a reported basis, net sales declined 1.4% year over year, driven by unfavorable currency impacts and an organic sales decline. Organic net sales were down 0.6% year over year due to a dip in Latin America and the Caribbean (“LAC”). The decline in LAC was driven by a 23.5% decrease in organic net sales due to lower consumption and reduced consumer demand from macroeconomic pressures in the region.
Excluding LAC, net sales grew 0.7% and organic net sales grew 2.5%, driven by strong growth in Europe, Asia Pacific and Africa, offset by a decline in North America.
Diageo plc Price, Consensus and EPS Surprise
Diageo plc price-consensus-eps-surprise-chart | Diageo plc Quote
The company notes that it is on track to deliver on its medium-term guidance for fiscal 2023-2025, wherein it targets organic sales growth of 5-7% and organic operating profit growth of 6-9%.
Shares of the Zacks Rank #3 (Hold) company have declined 6.4% in the past six months against the industry’s growth of 2.8%.
Image Source: Zacks Investment Research
1H24 Highlights
Organic volume declined 5.2% year over year. Price/mix grew 4.6% year over year, driven by growth across all regions, except for LAC. Price contribution to organic net sales was in the low to mid-single digits, driven by price increases, which helped mitigate the impacts of cost inflation and protect margins.
In North America, Diageo’s largest market, sales declined 2% year over year on both reported and organic basis due to weaker organic performances in U.S. Spirits and Canada, partially offset by growth from Diageo Beer Company. Additionally, net sales declined 12% in Africa and 18% in LAC. On a year-over-year basis, DEO witnessed net sales growth of 10% in Europe and 2% in the Asia Pacific.
The reported operating profit declined 11.1% year over year due to lower organic operating profit and the positive impacts of currency rates. The reported operating margin contracted 329 basis points (bps) on a lower organic operating margin and negative impacts of exceptional operating items.
Organic operating profit fell 5.4% year over year, with the organic operating margin contracting 167 bps due to weakness in LAC. Excluding LAC, the organic operating margin declined 53 bps, driven by higher marketing expenses, offset by the favorable impacts of other operating items and a positive gross margin.
The company earned an additional $335 million of productivity cost savings in cost of goods, marketing and overheads in the first half of fiscal 2024. It remains on track to surpass its three-year productivity savings target of $1.5 billion by the end of fiscal 2024.
Financials
At the end of the first half of fiscal 2024, Diageo delivered net cash from operating activities of $2,146 million. DEO reported a strong free cash flow of $1,462 million, driven by disciplined working capital management and the positive impacts of lapping one-time cash tax payments from the prior year.
Diageo is committed to its disciplined approach to capital allocation, primarily to enhance its shareholder value. DEO increased the interim dividend 5% to 40.50 cents per share. This reflects its strong liquidity position and confidence in the long-term health of its business. In the first half of fiscal 2024, the company returned $0.5 billion to shareholders through share buybacks under its buyback plan to repurchase up to $1 billion in fiscal 2024.
For fiscal 2024, the company expects capital expenditure of $1.3-$1.5 billion. It anticipates cash flow to increase on an organic basis in the second half of fiscal 2024.
FY24 Outlook
The company expects the organic net sales growth rate in the second half of fiscal 2024 to steadily improve from the growth rate in the first half.
In North America, Diageo expects organic net sales to improve gradually in the second half of fiscal 2024. The company anticipates the macroeconomic pressures in LAC to persist in the second half of fiscal 2024, which is likely to continue impacting inventory levels. Consequently, DEO expects organic net sales in LAC to decline 10-20% in the second half of fiscal 2024 from the second half of fiscal 2023. However, the company expects to finish fiscal 2024 with a more appropriate level of inventory for the current consumer environment.
In Europe, Asia Pacific and Africa, Diageo anticipates continued net sales growth in the second half of fiscal 2024.
The company estimates the tax rate before pre-exceptional items to be 23% in fiscal 2024, driven by the profit mix.
Looking for Solid Stocks? Check These
We highlighted three better-ranked companies in the Consumer Staples sector, namely The Boston Beer Company (SAM - Free Report) , The Coca-Cola Company (KO - Free Report) and Ingredion (INGR - Free Report) .
Boston Beer is one of the largest craft brewers in the United States. It presently flaunts a Zacks Rank #1 (Strong Buy). SAM has risen 8.1% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Boston Beer’s EPS for the current financial year suggests growth of 4% from the year-ago levels. SAM has a trailing four-quarter negative earnings surprise of 77.7%, on average.
Coca-Cola, a global beverage giant, presently has a Zacks Rank of 2 (Buy). KO has a trailing four-quarter earnings surprise of 5.1%, on average. KO shares have gained 6.1% in the past three months.
The Zacks Consensus Estimate for Coca-Cola’s sales and EPS for the current financial year suggests respective growth of 5.7% and 8.1% from the year-ago period’s reported figures.
Ingredion, an ingredients solutions provider specializing in nature-based sweeteners, starches and nutrition ingredients, presently has a Zacks Rank #2. INGR shares have rallied 17.4% in the past three months.
The Zacks Consensus Estimate for Ingredion’s sales and earnings for the current financial year suggests growth of 5% and 24.8%, respectively, from the year-ago period’s reported figure. INGR has an earnings surprise of 23.9% in the trailing four quarters, on average.