New year hangover for Diageo’s boss as expectations lowered again
Diageo is continuing to feel the fall out from last year’s profit warning and a weakening demand for premium spirits, as analysts slashed expectations for the Guinness maker.
The FTSE 100 firm, which also makes Smirnoff vodka and Captain Morgan rum, has around £29bn wiped off its market cap value over the past year amid a slowdown in trade.
This morning, analysts at Deutsche Bank agreed to reduce their estimates for the alcohol giant’s first half results for 2024, set to be published at the end of the month.
Organic sales are now forecast at -5.5 per cent, down from a previous expectation of -4.5 per cent. Experts at the firm also predicted earnings to contract 1.2 per cent this financial year, reaching £6.07bn.
“Industry data and peer read across suggest that Spirits demand has continued to deteriorate following Diageo’s 10 November 2023 profit warning,” they said.
“We therefore reduce our estimates for 1H and FY24 despite already being the lowest submitted to Vuma consensus. With scope for demand to deteriorate further we see the material 2H24 acceleration implied by consensus estimates as unlikely.”
It comes as the spirits to whiskey supplier downgraded its forecast for the year as a result of cash-strapped Latin American and Caribbean shoppers steering clear of top-shelf liquor.
China’s ‘anti dumping probe’ into EU Brandy – solidifying trade tensions between the two continents – is also expected to pile on more misery for the firm if the Asian superpower clamps down on imports.
Shares in the firm are now trading at the same level they did five years ago, struggling to keep up with their 2022 peak.
While analysts are keen to stick the boot in, Diageo is still one of the most high performing firms of the last decade.
The firm has made a number acquisitions over the past few year including Don Papa Rum, and George Clooney’s billon dollar Casamigos tequila,
Challenges for new boss Debra Crew
Close eyes on the firm come less than a year after its long serving chief Ivan Menezes, passed away unexpectedly, with successor Debra Crew forced to step into the role earlier than expected.
Crew, who was an internal recruit, has been tasked with steering one of the world’s largest alcohol groups amid a challenging time for both consumers and suppliers.
Diageo has not been helped by hiking prices for consumers – which it issued twice last year – chalking the decision up to rising costs.
“Like a lot of luxury goods firms, Diageo may be finding that it can only push prices so far before consumers start to retrench and cut back,” Russ Mould, investment director at AJ Bell, said.
Struggles to shift top-level alcohol in the US are not isolated.
Analysts at Jefferies have been flagging this slowdown, previously describing it as a “normalisation after two years of strong growth”.
“Investors made the (common) mistake of mistaking reliability for safety,” Mould added.
“Diageo was seen as providing reliable earnings, thanks to its global reach, the nature of its very popular products (consumer staples) and the power of its brands (which can in turn confer pricing power, a very useful facet when it comes to preserving profit margins at a time of galloping input cost inflation).”
He added: “In their quest for safety, investors bid up Diageo’s shares to a valuation multiple that, ironically, meant the shares offered less downside protection and less upside potential – so they were actually less safe, especially if anything unexpected went wrong, which it did with last November’s profit warning.”