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Diageo's Performance in 1H13

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Diageo Plc.’s (DEO - Free Report) earnings in the first half of fiscal 2013 went up 9% y/y to 60.9 pence (97 cents* per share) from 55.9 pence (89 cents** per share) in the same period in the previous year.

The increase in profit was the result of strong organic growth of Diageo’s strategic brands. Increasing reach to the burgeoning middle class coupled with fast penetration of the company into emerging markets contributed to the positive results.

On a reported basis, net revenue (i.e. total revenue minus excise duties) increased 5% to £6.0 billion ($9.6 billion) in the first half of fiscal year 2013 ending December 31, 2012. On an organic basis also, revenues increased 5%, while volume grew 1% y/y.

Diageo increased its marketing spending by 5% organically in the first half of fiscal 2013. Operating profit before exceptional items (excluding acquisitions and disposals) went up 9% year over year, on an organic basis.

Segment Details

Except Europe, all the regions have delivered positive organic sales growth.

In North America, Diageo’s organic sales increased 5% in the first half of fiscal 2013, with a volume growth of 1%. Price/mix contributed 4 percentage points to organic sales growth. Marketing spending increased 5% in the region, primarily because of the launch of Smirnoff Iced Cake and Kissed Caramel and Ketel One vodka. Operating profit grew 9% organically in the year.

Among the spirits, Cîroc showed strong performance in the first half of the year.. The lack of innovation in beers impacted performance in the first half.

In Europe, organic sales fell 2% along with volume declines of 3%. The company, saw 3% decline in operating profit despite a 2% decline in marketing spending.

The economy in Southern Europe remains challenging. While Diageo’s performance in Great Britain remained unchanged, Germany and Benelux performed well during the period. Johnnie Walker’s ultra premium brand performed well in the region.

In Africa, organic sales increased 10% in the first half, with a volume growth of 3%. Marketing spending increased 7% in the region, particularly behind core beer brands and international spirits. However, operating profit increased 17%.

The Latin America and Caribbean region delivered a strong performance in the year, with organic sales growth of 18% and volume growth of 7%. The company also increased its marketing spending by 22% to enhance the brand equities in scotch, increase the significance of vodka and support innovation. Despite the increasing costs, operating profit grew 23% in the first half.

In the Asia Pacific region, sales increased 6% organically with a volume growth of 1%. Marketing spending jumped 3% and operating profit grew 10%, on an organic basis. However, uncertainty around the global economy led to further contraction of the whisky market in Korea.

The company is increasing marketing investment in all the geographical segments, and is focusing more on its premium brands. The strategy of transitioning to high margin high priced products is helping the company improve its margins.

Currently, Diageo Plc carries a Zacks Rank #3 (Hold). We would also recommend that investors to consider Boston Beer Company Inc. (SAM - Free Report) , and Compania Cervecerias Unidas S.A. (CCU - Free Report) that carry a Zacks Rank #1 (Strong Buy) and Constellation Brands Inc. (STZ - Free Report) with a Zacks #2 (Buy). These companies offer a more attractive exposure to alcoholic beverage segments.

*£1=$1.59292 (average price of the year ended December 31, 2012).

**£1=$1.59244 (average price of the year ended June 30, 2011).

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