Sales Growth Expected To Slow Down In The First Half Of Its Financial Year For Diageo

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Diageo (NYSE:DEO) is set to report its first half of FY 2018 earnings on January 25, wherein it is expected to carry on its growth, albeit at a slower rate than that reported by the company recently. While whiskey sales are expected to continue to remain strong, certain factors may slow down the sales in India and China, two key markets for the company. Moreover, the sales growth coupled with the productivity initiatives undertaken by the company are expected to result in operating margin expansion. The US, its biggest market, is set to extend the momentum it has built recently, and Diageo is predicted to report another strong half in the region. Below, we’ll highlight the factors that are expected to have an impact on the company’s results.

We have a $158 price estimate for Diageo, which is higher than the current market price.

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1. Setbacks In India

Diageo’s acquisition of United Spirits, India’s leading alcoholic beverage company, which gave it a 54.78% stake in the company, bestowed it a foothold in the country, and provided it the footprint to compete and win in India. The region, Diageo’s second biggest market in terms of revenue, is considered to be a key growth market for the company, given the increasing disposable income, as well as the addition of LPA (legal purchase age) consumers. However, a Supreme Court ruling that prohibited the sale of alcohol within 500 meters of a highway is expected to have a negative impact on the company’s sales. Moreover, the Goods and Service Tax (GST) implemented in the country, which went live in July 2017, should have an impact on the margins in the future, as a result of higher tax rates on packaging material, molasses, and services, partially offset by reduced input costs.

2. Timing Of Chinese New Year

The Chinese New Year falls on February 16 this year, as compared to January 28 in 2017. This later timing of this festival, which is a driver for increased spirit sales, will have a positive impact in the second half of Diageo’s financial year, rather than its first half.

3. Impressive Performance Of Scotch

2017 was a good year for Scotch, with exports of premium, craft Scottish product returning to growth, and “Single Malt exports breaking £1 billion for the first time.” As Diageo is one of the biggest players in this field, it should benefit immensely from the broad-based growth reported in this industry.

4. Continued Momentum In North America

Organic net sales of US Spirits grew by 3.4% in FY 2017, driven by volume growth. However, they were held back by the performance of super premium vodka. Excluding this, the sales growth was 6.1%. The company has taken a number of actions to drive the sales growth, such as increasing the marketing spend, improving the digital content, leveraging partnerships with Drizly, Uber, and Tasty, launching innovation variants of its brands, drive efficiencies to cut down costs, etc., which should continue to benefit the company in the region.

5. Cost Savings And Productivity Initiatives

Organic net sales growth, driven by volume improvements and a strong price mix, helped to increase the operating margins for Diageo in FY 2017. These factors can again be expected to drive margin expansion, along with the cost savings and productivity initiatives implemented by the company. Given the impressive performance of the company in FY 2017, the management increased the productivity savings goal to £700 million from £500 million estimated earlier, two-thirds of which will be reinvested in the business. While the company continues to expect mid-single-digit top line growth, it is raising the margin improvement guidance provided earlier to 175 bps for the three years ending FY 2019 (ending June 2019).

See Our Complete Analysis For Diageo Here

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
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.

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