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Factors to Note Ahead of Diageo's (DEO) H1 FY21 Earnings

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Zacks Equity Research
·3 min read
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Diageo Plc DEO is scheduled to release interim results for the first half of fiscal 2021 on Jan 28. The company has been benefiting from strong fundamentals, continuous innovation and focus on expansion despite soft industry trends. However, the impacts of the coronavirus pandemic have been hurting its performance.

Notably, the alcoholic beverage company, which reports on a half-yearly basis, posted dismal results for fiscal 2020, driven by a decline in organic operating profit due to the impacts of the coronavirus outbreak. It recorded an earnings decline of 16% year over year in fiscal 2020, with an 8.7% fall in sales.

Key Factors to Note

In September 2020, Diageo revealed that fiscal 2021 performance is off to a good start. The gradual reopening of the on-trade channels, including bars and restaurants across the majority of the company’s markets coupled with solid off-trade demand and sturdy execution, have been tailwinds.

Diageo plc Price


Diageo plc Price
Diageo plc Price

Diageo plc price | Diageo plc Quote

Management cited that it witnessed sequential growth across all regions, with the U.S. business surpassing expectations on resilient consumer demand and robust spirits category. In the United States, higher retailer confidence has been aiding the off-trade channel, while the on-trade channel remains open in all the states involving certain capacity restrictions. In Europe, the company has been experiencing robust off-trade demand, whereas the on-trade channel has now reopened on the easing of lockdowns across most countries.

While the on-trade channel has been recovering in China, the return of larger banqueting occasions is happening at a slower pace. Moreover, the on-trade channel has started reopening in Africa, India, Latin America and the Caribbean. However, Diageo forecasts the speed of recovery in these markets to be more gradual. Furthermore, travel retail remains severely affected.

Overall, Diageo has been witnessing positive impacts of the measures it made to recover on-trade. The company has been using consumer insights and marketing effectiveness equipment to make prudent investments in the areas of innovation, e-commerce and new opportunities like at-home occasions.

As a result, management predicted sequential improvements in organic net sales, volume and operating profit in the first half of fiscal 2021. However, it continues to anticipate lower organic net sales and margin dilution than the year-ago period.

The Zacks Rank #3 (Hold) company also plans to increase marketing investment as demand recovers. Moreover, it has been relentlessly working to leverage its existing e-commerce capabilities and accelerate investments in the online platform to cater to the pandemic-driven shift in consumer shopping behavior.

Looking for Lucrative Picks? Check These

The Boston Beer Company, Inc. SAM has delivered an earnings surprise of 23.1%, on average, in the trailing four quarters. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Keurig Dr Pepper, Inc. KDP presently has an expected long-term earnings growth rate of 5.2% and a Zacks Rank #2.

Monster Beverage Corporation MNST has an expected long-term earnings growth rate of 12%. Currently, it carries a Zacks Rank #2.

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