Diageo Returns To Growth, Outlook Looks Bright

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DEO: Diageo logo
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Diageo

In its year ended June 2016 earnings, Diageo (NYSE:DEO) reported organic sales growth of 2.8%, after two years of largely flat growth, heralding a “single mid-digit top-line growth” in 2017. This performance was last achieved in 2013, after which the company has had to deal with changing consumer tastes and preferences in North America, the group’s largest market, and a slowdown in emerging markets, which has been the focus of Diageo’s investments. A better than expected turnaround of US Spirits, recovery in Europe, which accounts for 24% of the company’s operating profit, and 5% growth in India, Diageo’s second biggest single market, helped to spur this growth. Going forward, the company should grow at mid-single digits over the next three years, with a percentage point improvement in operating margins.

DEO Earnings 1

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Two of the biggest factors in the decline in reported sales growth were disposals and exchange rate movements, which reduced net sales by 5.3%. Even the operating profit was negatively impacted by adverse foreign currency rates, driven by the weakness in a number of currencies against the Sterling, particularly the Nigerian Naira, South African Rand, Venezuelan Bolivar, Brazilian Real, and the Turkish Lira. However, going forward, currency should not pose such a big problem if the pound continues to remain low. In the aftermath of the Brexit, the sterling has fallen considerably, which should be beneficial to the company, given its high exposure to the US.

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The company was able to deliver an operating margin expansion of 123 basis points, on the back of gross margin improvement and marketing spend efficiencies. Diageo was able to meet the target set in January 2014 regarding the cost efficiency program of £200 million of cost reduction, while coming up with new ways to carry out their productivity goal of £500 million.

DEO Earnings 3

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Notes:

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2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Diageo.