Diageo plc’s DEO earnings in fiscal 2015 (ended Jun 30, 2015) went down 7.6% (in local currency) year over year to 88.8 pence ($1.39* per share) from 95.5 pence ($1.55** per share) in the year-ago period.
Tough retail condition in the emerging markets lowered profit during the fiscal year.
On a reported basis, net revenue (i.e. total revenue excluding excise duties) went up 5% in local currency in fiscal 2015. Volume growth in reserve brands was largely offset by a decline in beer and scotch in the emerging markets, resulting in 1% decline in overall volume.
On an organic basis, net sales remained flat at £10.81 billion ($9.6 billion). Sales gains in Africa and Corporate were offset by decline in Latin America and Caribbean, Europe and Asia Pacific. Volume declined 2% on an organic basis.
In fiscal 2015, Diageo witnessed 1% decline in marketing spending, on an organic basis. Operating profit before exceptional items (excluding acquisitions and disposals) went up 1% year over year on an organic basis.
Segment Details
In North America, organic sales decreased 1% in fiscal 2015, as a 2% gain in Canada was offset by 3% decline in the U.S. Marketing spending decreased 4% in the region, primarily backed by savings in media and agency fees and procurement efficiencies. Advertising focused on Cîroc, Crown Royal, Smirnoff, Captain Morgan, and Johnnie Walker, and especially Don Julio and Bulleit to support new programs.
Operating profit plunged 37% organically in the fiscal year. In Canada, net sales grew 2% as strong growth in reserve brands backed by the Cîroc and scotch malt brands was offset by the general slowdown in the economy.
Sales of Beer and Ready-to-Drink declined mainly due to intense competition and supply disruptions.
In Europe, organic sales and volume remained flat as sales growth in Western Europe and Turkey was offset by decline in Russia and Eastern Europe. Operating profit went up 20% in the region while margin expanded 75 basis points (bps). The upside was largely driven by gross margin improvement in Turkey, and overhead cost reduction in Western Europe, which was partially reinvested in marketing spend and route to consumer.
Organic sales in Africa increased 6%, with 7% volume gain due to strong gains of premium brands. Marketing spending increased 5%, particularly on brand building initiatives. Operating profit remained flat, although operating margin improved 75 bps.
The Latin America and Caribbean region’s performance was modest in the fiscal year, with only 1% decline each in organic sales and volume due to a decline in Brazil, offset by strong growth in Venezuela, Colombia and Mexico. The company also increased its marketing spending by 6% to support broader participation within spirits. Investment in scotch was focused on enhancing brand equity across price points in Mexico. Operating profit declined 7%.
In the Asia Pacific region, sales slipped 2% due to weaker trading environment in South East Asia and disruptions in Indonesia due to new restrictions on the sale of beer and Ready-to-Drink in some channels. However, the company gained share in all the other markets, including China, led by growth in Chinese spirits.
Marketing spending decreased 7% mainly due to lower expenditure in international spirits in China and South East Asia. Chinese white spirits business regained profitability after a loss incurred last year. This, along with the cost savings, resulted in an overall operating profit improvement of 20% in Asia Pacific.
Other Updates
Diageo is expanding fast into the emerging markets. The company holds acquired ownership in United Spirits Limited, a leading spirit company of India.Moreover, during fiscal 2015, the company gained full control of the tequila brand, Don Julio, in an attempt to boost its presence in the premium tequila category.
Currently, Diageo carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector are Castle Brands Inc. ROX and Constellation Brands Inc. STZ. Both these stocks carry a Zacks Rank #2 (Buy). Another consumer staples stock worth considering includes Dr. Pepper Snapple Inc. DPS also carrying a Zacks Rank #2.
*£1=$1.5732 (average price of the year ended Jun 30, 2015).
**£1=$1.6257 (average price of the year ended Jun 30, 2014).
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