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Diageo's (DEO) Strategic Endeavors on Track: Stock to Gain
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Diageo Plc (DEO - Free Report) looks well-poised on a slate of endeavors, including premiumization efforts, disciplined cost management, pricing actions, supply productivity savings, innovation and marketing investments. Additionally, the company has been benefiting from its diversified footprint, advantaged portfolio and strong brands.
DEO has been witnessing solid business momentum, strong consumer demand and market share gains, which have been boosting its performance. The company is confident about the long-term potential of the total beverage alcohol sector. DEO expects to expand its value share by 50% in the sector to 6% by 2030.
The Zacks Consensus Estimate for DEO’s fiscal 2024 sales suggests growth of 5.6% from the year-ago period’s reported number.
However, continued inflationary pressures, driven by higher commodity costs, particularly agave, energy expenses and supply disruptions have been headwinds. Also, elevated inventory levels in Latin America and the Caribbean (“LAC”) have been denting the company’s performance.
Shares of the Zacks Rank #3 (Hold) company have lost 1.2% in the year-to-date period compared with the industry’s decline of 5%.
Image Source: Zacks Investment Research
What Works Well for DEO
Diageo is progressing well with its new productivity commitment to deliver $2 billion of productivity savings between fiscal 2025 and fiscal 2027, as announced at the Capital Markets Event in November 2023.
Per the plan, the company expects to deliver this accelerated productivity commitment across the cost of goods, marketing spends and overheads. It plans to support this acceleration through investments, including its supply-chain agility program announced in July 2022. The company expects benefits from the supply-chain agility program to increase from fiscal 2025 and accelerate in the following years.
Notably, DEO earned an additional $335 million of productivity cost savings in the cost of goods, marketing expenses and overheads in the first half of fiscal 2024. It is on track to surpass its three-year productivity savings target of $1.5 billion by the end of fiscal 2024.
Diageo is expected to continue benefiting from its diversified footprint, advantaged portfolio, strong brands, pricing initiatives and productivity savings. The company’s improved price/mix partly aided the results in the first half of fiscal 2024 despite soft volume. The higher price/mix mainly resulted from price increases across all regions, supported by DEO’s efficient product portfolio.
In the first half of fiscal 2024, the company reported a 4.6% year over year improvement in the price/mix, 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.
Going forward, Diageo expects to invest strongly in marketing and innovation, and leverage its revenue growth management capabilities, including strategic pricing actions. 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. While it expects a decline in LAC, Diageo anticipates continued net sales growth in Europe, the Asia Pacific and Africa 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.
Headwinds to Counter
Diageo suffers from persistent inflationary pressures induced by higher commodity costs, particularly agave, energy expenses and supply disruptions. As a substantial portion of DEO’s business comes from international operations, exchange rate fluctuations have been hampering its sales for a while.
Moreover, the company witnessed significant impacts in the first half of fiscal 2024, backed by a substantially weak performance in LAC, which contributes 10% to its net sales. The fast-changing consumer sentiment and high inventory levels have significantly impacted the total business performance in the LAC region, which was identified at the end of fiscal 2023. The region has been pressured with excess inventory levels at its direct customers. Despite corrective measures, the elevated inventory levels impacted LAC’s performance in the first half of fiscal 2024.
Diageo anticipates macroeconomic pressures in LAC to persist in the second half of fiscal 2024, which are likely to continue impacting inventory levels. Consequently, DEO expects organic net sales in LAC to decline 10-20% year over year in the second half of fiscal 2024. However, the company anticipates ending fiscal 2024 with a more appropriate level of inventory for the current consumer environment.
Conclusion
Although the company predicts a challenging operating environment for fiscal 2024, it predicts a gradual improvement in year-over-year comparisons in the second half of fiscal 2024. It expects to deliver improvement in organic net sales and organic operating profit growth at the group level from the first half.
Diageo has been 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 improvement of 6-9%.
Key Picks
We have highlighted three better-ranked stocks from the Consumer Staple sector, namely Vita Coco Company (COCO - Free Report) , Molson Coors (TAP - Free Report) and Coca-Cola FEMSA (KOF - Free Report) .
Vita Coco, which develops, markets and distributes coconut water products in the United States, Canada, Europe, the Middle East and the Asia Pacific, currently sports a Zacks Rank #1 (Strong Buy). COCO shares have declined 0.5% year to date. You can see the complete list of today's Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Vita Coco’s current financial year’s sales and earnings per share suggests growth of 1.8% and 24.3%, respectively, from the year-ago reported figures. COCO has a trailing four-quarter earnings surprise of 31.3%, on average.
Molson Coors is a global manufacturer and seller of beer and other beverage products, with an impressive diverse portfolio of owned and partner brands. It has a trailing four-quarter earnings surprise of 37.2%, on average. It currently carries a Zacks Rank #2 (Buy).
The Zacks Consensus Estimate for Molson Coors’ current financial-year sales and earnings suggests growth of 1.4% and 4.2%, respectively, from the prior-year reported levels. TAP shares have risen 10% year to date.
Coca-Cola FEMSA is involved in producing, marketing and distributing soft drinks throughout the metropolitan area of Mexico City. It currently carries a Zacks Rank #2. KOF shares have risen 0.3% in the year-to-date period.
The Zacks Consensus Estimate for KOF’s current financial-year sales and earnings suggests growth of 10.1% and 25.5%, respectively, from the year-earlier actuals. It has a trailing four-quarter negative earnings surprise of 2.1%, on average.
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Diageo's (DEO) Strategic Endeavors on Track: Stock to Gain
Diageo Plc (DEO - Free Report) looks well-poised on a slate of endeavors, including premiumization efforts, disciplined cost management, pricing actions, supply productivity savings, innovation and marketing investments. Additionally, the company has been benefiting from its diversified footprint, advantaged portfolio and strong brands.
DEO has been witnessing solid business momentum, strong consumer demand and market share gains, which have been boosting its performance. The company is confident about the long-term potential of the total beverage alcohol sector. DEO expects to expand its value share by 50% in the sector to 6% by 2030.
The Zacks Consensus Estimate for DEO’s fiscal 2024 sales suggests growth of 5.6% from the year-ago period’s reported number.
However, continued inflationary pressures, driven by higher commodity costs, particularly agave, energy expenses and supply disruptions have been headwinds. Also, elevated inventory levels in Latin America and the Caribbean (“LAC”) have been denting the company’s performance.
Shares of the Zacks Rank #3 (Hold) company have lost 1.2% in the year-to-date period compared with the industry’s decline of 5%.
Image Source: Zacks Investment Research
What Works Well for DEO
Diageo is progressing well with its new productivity commitment to deliver $2 billion of productivity savings between fiscal 2025 and fiscal 2027, as announced at the Capital Markets Event in November 2023.
Per the plan, the company expects to deliver this accelerated productivity commitment across the cost of goods, marketing spends and overheads. It plans to support this acceleration through investments, including its supply-chain agility program announced in July 2022. The company expects benefits from the supply-chain agility program to increase from fiscal 2025 and accelerate in the following years.
Notably, DEO earned an additional $335 million of productivity cost savings in the cost of goods, marketing expenses and overheads in the first half of fiscal 2024. It is on track to surpass its three-year productivity savings target of $1.5 billion by the end of fiscal 2024.
Diageo is expected to continue benefiting from its diversified footprint, advantaged portfolio, strong brands, pricing initiatives and productivity savings. The company’s improved price/mix partly aided the results in the first half of fiscal 2024 despite soft volume. The higher price/mix mainly resulted from price increases across all regions, supported by DEO’s efficient product portfolio.
In the first half of fiscal 2024, the company reported a 4.6% year over year improvement in the price/mix, 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.
Going forward, Diageo expects to invest strongly in marketing and innovation, and leverage its revenue growth management capabilities, including strategic pricing actions. 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. While it expects a decline in LAC, Diageo anticipates continued net sales growth in Europe, the Asia Pacific and Africa 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.
Headwinds to Counter
Diageo suffers from persistent inflationary pressures induced by higher commodity costs, particularly agave, energy expenses and supply disruptions. As a substantial portion of DEO’s business comes from international operations, exchange rate fluctuations have been hampering its sales for a while.
Moreover, the company witnessed significant impacts in the first half of fiscal 2024, backed by a substantially weak performance in LAC, which contributes 10% to its net sales. The fast-changing consumer sentiment and high inventory levels have significantly impacted the total business performance in the LAC region, which was identified at the end of fiscal 2023. The region has been pressured with excess inventory levels at its direct customers. Despite corrective measures, the elevated inventory levels impacted LAC’s performance in the first half of fiscal 2024.
Diageo anticipates macroeconomic pressures in LAC to persist in the second half of fiscal 2024, which are likely to continue impacting inventory levels. Consequently, DEO expects organic net sales in LAC to decline 10-20% year over year in the second half of fiscal 2024. However, the company anticipates ending fiscal 2024 with a more appropriate level of inventory for the current consumer environment.
Conclusion
Although the company predicts a challenging operating environment for fiscal 2024, it predicts a gradual improvement in year-over-year comparisons in the second half of fiscal 2024. It expects to deliver improvement in organic net sales and organic operating profit growth at the group level from the first half.
Diageo has been 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 improvement of 6-9%.
Key Picks
We have highlighted three better-ranked stocks from the Consumer Staple sector, namely Vita Coco Company (COCO - Free Report) , Molson Coors (TAP - Free Report) and Coca-Cola FEMSA (KOF - Free Report) .
Vita Coco, which develops, markets and distributes coconut water products in the United States, Canada, Europe, the Middle East and the Asia Pacific, currently sports a Zacks Rank #1 (Strong Buy). COCO shares have declined 0.5% year to date. You can see the complete list of today's Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Vita Coco’s current financial year’s sales and earnings per share suggests growth of 1.8% and 24.3%, respectively, from the year-ago reported figures. COCO has a trailing four-quarter earnings surprise of 31.3%, on average.
Molson Coors is a global manufacturer and seller of beer and other beverage products, with an impressive diverse portfolio of owned and partner brands. It has a trailing four-quarter earnings surprise of 37.2%, on average. It currently carries a Zacks Rank #2 (Buy).
The Zacks Consensus Estimate for Molson Coors’ current financial-year sales and earnings suggests growth of 1.4% and 4.2%, respectively, from the prior-year reported levels. TAP shares have risen 10% year to date.
Coca-Cola FEMSA is involved in producing, marketing and distributing soft drinks throughout the metropolitan area of Mexico City. It currently carries a Zacks Rank #2. KOF shares have risen 0.3% in the year-to-date period.
The Zacks Consensus Estimate for KOF’s current financial-year sales and earnings suggests growth of 10.1% and 25.5%, respectively, from the year-earlier actuals. It has a trailing four-quarter negative earnings surprise of 2.1%, on average.