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Diageo (DEO) Posts Strong 1H19 Earnings, Ups FY19 Sales View

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Diageo plc (DEO - Free Report) reported interim results for the first half of fiscal 2019, ended Dec 31, 2018 (first half of fiscal 2019), wherein pre-exceptional earnings per share improved 13.6% year over year to 77 pence (in local currency). This was backed by a higher organic operating profit and lower finance charges, which negated impacts of increased tax expenses and unfavorable currency.

Diageo’s stock has surged nearly 5.6% yesterday. Moreover, shares of this Zacks Rank #3 (Hold) company rallied 7.7% in the past year against the industry’s decline of 22.4%. Clearly, this alcohol giant is riding on the focus on innovations, achieving growth through buyouts and penetration in emerging markets.

 



Highlights of First Half of Fiscal 2019

On a reported basis, net sales and operating profit moved up 5.8% and 11%, respectively, owing to organic growth, partly negated by unfavorable exchange rates. Top-line growth also included slight negative impacts of the sale of a portfolio of 19 brands to Sazerac in December 2018.

Organic sales increased 7.5%, benefiting from broad-based volume and sales growth across all regions, and categories. Notably, organic volume was up 3.5% and positive price mix grew 4%. Volume growth was mainly attributed to gains in India, which contributed about 60% of the total volume growth. Additionally, strong volume gains came from gin and scotch categories.  Price/mix was positive across all regions, with particular growth coming from strength in U.S. spirits and scotch.

Gross margin expanded nearly 50 basis points (bps) during the first half as negative impacts of inflation in the cost of goods sold (COGS) were more than offset by favorable price/mix and productivity efficiencies. During the first half, the company witnessed inflationary pressures from commodity costs, including Agave, cereals, utilities and glass. Furthermore, higher transportation costs in the United States offset gross margin gains.

Improved price/mix and efficiencies from the productivity program aided organic operating profit, which grew 12.3%, higher than top-line growth. Notably, impacts of cost inflation and higher marketing expenses were fully offset by aforementioned positives. Further, organic operating margin expanded 152 bps, driven by phasing benefits.

Financials

Diageo continues to generate solid cash flows, with net cash from operating activities of £1.6 billion improving year over year. Furthermore, the company reported strong free cash flow of about £1.3 billion, up £317 million from the last year.

Diageo remains committed to its disciplined approach to capital allocation, primarily to enhance shareholder value. In sync with that, the company returned £1.3 billion to shareholders in the first half of fiscal 2019 through share repurchases.

Backed by strong free cash flow, the company approved additional share buybacks worth £660 million under its existing share-buyback program. As a result, it will now repurchase shares worth up to £3 billion for the year ending on 30 Jun, 2019. It also increased interim dividend by 5%.

Outlook

Diageo expects synergies from productivity initiatives to persist in fiscal 2019. The company anticipates net sales growth in the second half of fiscal 2019 to be lower than the first half. However, it now expects organic net sales for fiscal 2019 to be at the high-end of its prior guidance of mid-single-digit growth. Based on current rates, the company expects currency headwinds to significantly impact net sales by £80 million and operating profit by £10 million.

The company expects inflationary cost pressures from commodity and transportation to continue in the second half of fiscal 2019. This should continue to slightly weigh on the gross margin. Further, it expects operating margin growth to be muted in the second half, owing to the phasing of productivity costs and marketing expenses.

Nonetheless, the company expects to deliver on its targeted operating margin expansion of 175 bps for the three years ending on Jun 30, 2019.

Looking for Solid Stocks, Check These

Some better-ranked stocks in the consumer staples sector are Ambev S.A. (ABEV - Free Report) , Coca-Cola European Partners PLC (CCEP - Free Report) and Monster Beverage Corporation (MNST - Free Report) , each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ambev has average long-term earnings growth rate of 10%. Moreover, the stock increased 7.8% in the last three months.

Coca-Cola European Partners has rallied 24.3% in the past year. The company has average long-term earnings growth rate of 8.7%.

Monster Beverage has average long-term earnings growth rate of 16%. Moreover, the stock surged 5.8% in the last three months.

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