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Diageo (DEO) FY17 Earnings: Sales and Productivity Go Up

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Diageo plc (DEO - Free Report) reported preliminary fiscal 2017 results ending Jun 30, wherein earnings gained 21.0% (in local currency) year over year. This was backed by increased organic profit, associate income and favorable currency exchange which more than offset the impacts of tax rate and disposals.  

Fiscal 2017 Highlights

On a reported basis, net sales as well as operating profits moved up 15% and 25%, respectively, owing to organic growth and favorable exchange rates.

Broad-based organic sales increased 4.3%, gaining from contributions from all regions, while organic volume grew 1.1%. The progress in top line as well as productivity had favorably impacted the organic operating profit, which grew 5.6% and was partially offset by one-off items and implementation costs. Further, free cash flows also remained strong.

Diageo has been focusing on growth through acquisitions, innovation and expansion in emerging markets. The company’s strong fundamentals have aided its shares to rally 13.2% over the last one year, outperforming the broader Consumer Staples sector’s increase of 1.9%.

Segment Details

Net sales grew in North America by 3% in fiscal 2016 due to improved performance of the Diageo Beer Company USA, US Spirits and Canada.  Categorically, the strongest performance was delivered by North American whiskey, tequila and scotch.

Increased focus on core brands led to the marketing expenditure in the region to increase by 4%. Nevertheless, gross margin expansion, organizational effectiveness and low overhead costs aided the operating margin to expand by 51 basis points (bps).

In Europe, Russia and Turkey, net sales inched up 5% on higher sales in all regions. Net sales in Europe were up 4% due to continued gain in market share of spirits, strong brand performance and innovation. Although the volumes in Russia and Turkey were down, both regions depicted a rise in net sales owing to price hike.

Operating margin in the region improved 91 bps due to strong productivity initiatives, offset partially by one-off operating costs. 

Net sales in Africa increased 5%, driven by strong performance from all market, except East Africa. Supply savings, zero-based budgeting on indirect spend and overall organizational effectiveness led to an increase of 60 bps in operating margin in the region, which partially offset the rise in marketing spend.

Net sales in the Latin America and Caribbean region increased 9% backed by strong growth in Mexico. Net sales of scotch across the regions had surged by 12%. Operating margin in the region increased 111 bps owing to improve product mix in Mexico, marketing efficiency and overhead savings.

In the Asia Pacific region, sales gained 3% backed by growth in Greater China, Australia and South East Asia. This was partially offset by the contraction of scotch category in Korea. Operating margin improved 20 bps in the region owing to overhead efficiencies and growth of reserve brands.

Other Updates

The company recently announced the acquisition of the fastest-growing premium tequila brand in the U.S., Casamigos. The buyout is expected to boost Diageo’s market share in the tequila category, along with the existing Don Julio brand. The deal is worth $1 billion. The company will initially pay $700 million and $300 million later after looking into the performance of the brand over the next decade. (Read More: Diageo Strengthens Tequila Category with Casamigos Buyout)

Outlook

Diageo continues to expect organic net sales to improve in the mid-single digit. However, the company raised its margin growth objective from 100 bps to 175 bps over the three years ending on Jun 30, 2019.

Zacks Rank & Key Picks

Diageo currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same sector includes Inter Parfums, Inc. (IPAR - Free Report) , Kellogg Company (K - Free Report) and Nu Skin Enterprises, Inc. (NUS - Free Report) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Inter Parfums has an average positive earnings surprise of 15.6% over the last four quarters, with a long-term earnings growth rate of 12.3%.

Kellogg Company has an average positive earnings surprise of 6.2% over the last four quarters, with a long-term earnings growth rate of 6%.

Nu Skin Enterprises has an average positive earnings surprise of 8.3% over the last four quarters, with a long-term earnings growth rate of 8.5%.

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