Here's How Diageo (DEO) is Placed Ahead of 1H23 Earnings
Diageo Plc DEO is scheduled to release interim results for the first half of fiscal 2023 on Jan 26. The company has been benefiting from the recovery in consumer demand across markets and market share gains. DEO is anticipated to have retained the strength in its business on constant premiumization efforts and favorable industry trends, particularly in the spirits category. However, Diageo has been suffering from persistent inflationary pressures, induced by higher commodity costs, particularly agave, energy expenses and supply disruptions.
Notably, the alcoholic beverage company, which reports on a half-yearly basis, posted strong top-line growth, gross margin expansion and productivity savings in fiscal 2022. Effective marketing and exceptional commercial execution further aided the results.
We expect the company’s first-half fiscal 2023 total revenues to increase 21.4% year over year in local currency and the bottom line in U.S. dollars to increase 27.4% to $8.05 per share.
Diageo plc Price, Consensus and EPS Surprise
Diageo plc price-consensus-eps-surprise-chart | Diageo plc Quote
Key Factors to Note
Strong consumer demand in the off-trade channel and recovery of the on-trade channel in key markets are likely to have aided Diageo’s top and bottom lines in the first half of fiscal 2022. Recovery in the on-trade channel in North America and Europe, and the partial recovery in Travel Retail have been aiding the price/mix for a while. The robust performance of its super-premium-plus brands, particularly scotch, tequila and Chinese white spirits, is expected to have led to a continued positive mix for Diageo in the first half.
Diageo has been well-poised for growth from effective marketing and exceptional commercial execution. It has been investing strongly in marketing and innovation, and leveraging its revenue growth management capabilities, including strategic pricing actions. This is likely to support DEO’s top and bottom-line growth in the to-be-reported period’s results.
Moreover, DEO’s margin trends have been favorable, owing to its premiumization efforts, rebound in markets, pricing actions and supply productivity savings, which have been offsetting the cost inflation. Productivity savings, driven by COGS productivity and marketing effectiveness, are expected to aid margin in the first half of fiscal 2023.
Although Diageo expects the operating environment to be challenging in fiscal 2023, it remains confident about its business resilience and ability to navigate the headwinds. In the fiscal 2022 earnings call, the company anticipated market growth across North America, Europe and the Asia Pacific in fiscal 2023 to aid the top line. This is likely to get reflected in the first-half performance. It anticipates continued organic operating margin growth for fiscal 2023, aided by strong premiumization trends and operating leverage despite constant.
However, the company has been witnessing inflationary pressures, induced by higher commodity costs, particularly agave, energy expenses and supply disruptions. As a substantial portion of Diageo’s business comes from international operations, exchange rate fluctuations have been hampering its sales for a while.
While the weakening of sterling against the U.S. dollar and some impacts of emerging market currencies look favorable, Diageo expects adverse currency impacts from hyperinflationary economies, primarily Turkey.
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