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Diageo's FY20 Profits to be Hurt by Coronavirus Outbreak

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Diageo plc DEO is the latest company to assess how much impact the deadly coronavirus outbreak will have on its fiscal 2020 results. The outbreak of COVID-19 virus in China has given rise to a tough situation for companies operating in the region.

The impact of the coronavirus can already be seen on China’s economy. Notably, public health measures across impacted countries in Asia Pacific, primarily in China. These have resulted in restrictions on public gatherings, the postponement of events and the closure of many hospitality and retail outlets. Several countries and many businesses have also imposed restrictions on travel.

Diageo mentioned that bars and restaurants have largely been closed in China and there has been a significant decrease in dine-out. Also, the company cited that it has seen significant disruption since the end of January as majority of consumption is in the on-trade.

Given the epidemic outbreak in the country, Diageo is prioritizing on health and safety of employees. Consequently, it expects China operations to witness softness in the near term, which should have a pronounced impact on fiscal 2020 results.

The company anticipates the negative impact of coronavirus outbreak on its fiscal 2020 organic net sales to be £225-£325 million and organic operating profit to be £140-£200 million.

Nevertheless, the company remains confident about long-term growth opportunities in Greater China and Asia Pacific business. Its diversified business and operating model in other key regions keep it well placed to navigate the impact of the coronavirus condition. Management expects a gradual improvement with consumption returning to normal levels toward the end of fiscal 2020.

Other beverage companies that recently provided updates on the estimated impacts of the virus spread on its results are Coca-Cola KO and Anheuser-Busch BUD. Coca-Cola expects the COVID-19 to hurt its first-quarter 2020 organic revenues by 1-2 percentage points, unit case volume by 2-3 percentage points and earnings per share by 1-2 cents. Meanwhile, AB InBev stated that the outbreak has caused nearly $285 million of lost revenues and $170 million of lost EBITDA in the first two months of 2020. In the first quarter of 2020, AB InBev expects EBITDA to decline by nearly 10% driven by the impact of COVID-19 as well as a challenging comparable, especially in Brazil.

Additionally, the swoosh brand owner, NIKE NKE has temporarily closed nearly half of company-owned stores in Greater China, which is likely to hurt results in the ongoing quarter.

Coming back to Diageo, we note that shares of this Zacks Rank #3 (Hold) company have decreased 11.4% in the past three months, compared with the industry’s decline of 14.2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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