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Diageo investors emerge from ‘deep freeze’
Alcohol companies remain cautious about the global outlook but Diageo’s results signal that the worst of the 2024 slump could be passing, reports Ron Emler.
After crashing by 12% on its now infamous trading warning last November, Diageo’s shares had fallen by a further 11% this year.
But within five days last week, they put on 7% to £26.50, still far from the £40+ peak they achieved in April 2022, but nevertheless an indication that investor sentiment might be coming out of the deep freeze.
At the company’s annual meeting last week, chief executive Debra Crew said the world’s biggest premium beverage alcohol group expects a return to growth once the consumer environment improves, and that it is well positioned to outperform the market.
Crucially she said: “Our expectations are unchanged from when we reported our fiscal 24 preliminary results on 30 July 2024.”
In other words, conditions have not worsened and the group saw no reason to downgrade its guidance.
Medium term
In the medium term, Diageo is targeting organic net sales growth between 5% and 7%. Additionally, it expects organic operating profit to grow in line with net sales with continued investments in its business.
In the long term, it aims to achieve through premiumisation organic operating profit growth that outpaces organic net sales growth
Crew went on to say: “We have made good progress on our strategic initiatives, including our US route-to-market enhancements.”
Translation? When the world’s biggest market starts to pick up, Diageo expects to benefit disproportionately.
The previous day Diageo had acquired Ritual Zero Proof Non-Alcoholic Spirits, a company it had incubated through its Distill Ventures arm, over the past four years.
Ritual is now the leading alcohol-free spirit brand in the United States and the sixth largest by value globally.
That places Diageo at the heart of catering for discerning non-alcohol consumers, especially those in Generation Z, where the trend is growing.
That cheered analysts, most of whom by the end of last week were viewing Diageo’s shares more positively.
Indeed, one suggested that while they remained almost 40% below their peak value, a private equity consortium might consider a takeover bid before they strengthen.
Crew had told shareholders: “I believe that the fundamentals for global TBA [total beverage alcohol], and particularly the spirits industry, remain strong and am confident that when the consumer environment improves, growth will return and the actions we are taking will position us well to outperform the market.”
Then at the end of the week a significant signal came that global economic conditions could begin to revive quite quickly, spurring consumer confidence.
The Chinese government unveiled a large package of measures designed to stimulate its economy, combat its significant housing debt crisis and put money back in people’s pockets.
That boosted companies trading in China, including Diageo. (LVMH put on 15% in the day).
Straws in the wind, maybe, but equally green shoots that suggest that the days of drowning sorrows may be receding.
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