Pricing & Productivity Plans Keep Diageo (DEO) on Growth Track
Diageo Plc DEO has retained its momentum, thanks to strong consumer demand and market share gains. The company has been witnessing significant gains from its improved price/mix, which partly aided the results in the first half of fiscal 2024. DEO remains on track to surpass its three-year productivity savings target of $1.5 billion by the end of fiscal 2024.
Additionally, the company’s endeavors, including premiumization efforts, disciplined cost management, pricing actions and supply productivity savings, appear encouraging. It is confident about the long-term potential of the total beverage alcohol sector and expects to expand its value share by 50% in the sector to 6% by 2030.
However, Diageo has been witnessing inflation in commodity costs, mainly related to increased prices for glass, paper, metal, and higher energy and transportation costs. Also, elevated inventory levels in LAC have been denting the company’s performance.
Shares of the Zacks Rank #3 (Hold) company have risen 3.2% in the year-to-date period against the industry’s decline of 2%.
Image Source: Zacks Investment Research
Factors Aiding Growth
Diageo is expected to continue benefiting from its diversified footprint, advantaged portfolio, strong brands, pricing initiatives, and productivity savings. The company’s improved price/mix partly aided results in the first half of fiscal 2024 despite soft volume. The higher price/mix mainly resulted from price increases across all regions, supported by the company’s efficient product portfolio.
In the first half of fiscal 2024, the company reported a 4.6% improvement in the price/mix, driven by growth across all regions, except for Latin America and the Caribbean (“LAC”). Price contribution to organic net sales was in the low to mid-single digits, driven by price increases, which helped mitigate the impacts of cost inflation and protect margins.
In the first half of fiscal 2024, the price/mix grew 1% year over year in North America, 7% in Europe, 8% in the Asia Pacific and 9% in Africa, mainly on price increases. However, the price/mix declined 4% in LAC, driven by higher trade investment to manage inventory toward suitable levels for the current macroeconomic environment, and consumer downtrading. Backed by pricing gains and excluding LAC, the company’s net sales grew 0.7% and organic net sales rose 2.5% in the first half of fiscal 2024.
Diageo is progressing well with its new productivity commitment to deliver $2 billion of productivity savings over three years (from fiscal 2025 to fiscal 2027), as announced at the Capital Markets Event in November 2023. Per the plan, the company expects to deliver accelerated productivity commitment across the cost of goods, marketing spends and overheads.
The company plans to support this acceleration through investments, including its supply-chain agility program announced in July 2022. It expects benefits from the supply-chain agility program to increase from fiscal 2025 and accelerate in the following years.
Notably, the company earned an additional $335 million of productivity cost savings in cost of goods, marketing expenses and overheads in the first half of fiscal 2024. It remains on track to surpass its three-year productivity saving target of $1.5 billion by the end of fiscal 2024.
Hurdles to Overcome
Diageo suffers from persistent 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.
The company’s gross profit declined 1.8% year over year in the first half of fiscal 2024, mainly owing to cost pressures. Productivity savings, supply efficiencies and pricing actions offset the absolute impacts of cost inflation. The significant cost pressure in the first half of fiscal 2024 mainly related to increased glass, paper, metal and transportation costs.
Moreover, Diageo witnessed significant impacts in the first half of fiscal 2024, backed by a substantially weak performance in LAC, which contributes 10% of its net sales. The fast-changing consumer sentiment and high inventory levels have significantly impacted the total business performance in the LAC region, which was identified at the end of fiscal 2023. The region has been pressured with excess inventory levels at its direct customers. Despite corrective measures, the elevated inventory levels impacted LAC’s performance in the first half of fiscal 2024.
Diageo anticipates macroeconomic pressures in LAC to persist in the second half of fiscal 2024, which are likely to continue impacting inventory levels. Consequently, DEO expects organic net sales in LAC to decline 10-20% year over year in the second half of fiscal 2024. However, the company anticipates ending fiscal 2024 with a more appropriate level of inventory for the current consumer environment.
Stocks to Consider
We highlighted some better-ranked stocks from the beverages space, namely Molson Coors TAP, Coca-Cola FEMSA KOF and Vita Coco Company COCO.
Molson Coors currently sports a Zacks Rank #1 (Strong Buy). TAP has a trailing four-quarter earnings surprise of 37.2%, on average. TAP shares have risen 7.8% year to date.
You can see the complete list of today's Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Molson Coors’ current financial-year sales and earnings suggests growth of 1.3% and 4.2%, respectively, from the year-ago period's reported figures.
Coca-Cola FEMSA currently has a Zacks Rank #2 (Buy). KOF shares have gained 2% in the year-to-date period.
The Zacks Consensus Estimate for Coca-Cola FEMSA’s sales and earnings per share for the current financial year suggests growth of 10.1% and 24.4%, respectively, from the year-ago period’s reported figures. KOF has a trailing four-quarter negative earnings surprise of 2.1%, on average.
Vita Coco has a trailing four-quarter earnings surprise of 31.3%, on average. It currently carries a Zacks Rank #2. COCO shares have declined 2.9% in the year-to-date period.
The Zacks Consensus Estimate for Vita Coco’s current financial-year sales and earnings suggests growth of 1.8% and 23%, respectively, from the year-ago period's reported figures.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Vita Coco Company, Inc. (COCO) : Free Stock Analysis Report
Molson Coors Beverage Company (TAP) : Free Stock Analysis Report
Diageo plc (DEO) : Free Stock Analysis Report
Coca Cola Femsa S.A.B. de C.V. (KOF) : Free Stock Analysis Report
