Diageo plc’s DEO earnings in the first half of fiscal 2016 (ended Dec 31, 2015) went up 7% (in local currency) year over yearto 51.3 pence(86 cents* per share) backed by higher sales.
On an organic basis, net sales increased 1.8% backed by volume growth and positive volume mix. Volume increased1% on an organic basis.
Reported net sales (i.e. total revenue excluding excise duties) declined 5% in local currency in the first half of fiscal 2016. Operating profit before exceptional items (excluding acquisitions and disposals) went up 2.4% year over year on an organic basis.
Segment Details
In North America, organic sales decreased 2%, Marketing spending decreased 10% in the region, primarily backed by savings in media and agency fees as well as procurement efficiencies. Advertising focused on Cîroc, Crown Royal, Smirnoff, Captain Morgan and Johnnie Walker, and especially Don Julio and Bulleit brands.
Operating profit plunged 2% organically in the reported period.In Canada, net sales grew 5% backed by strong growth in the reserve brands, mainly the Cîroc.
Sales of Beer and Ready-to-Drink declined mainly due to intense competition and supply disruptions.
In Europe, Russia and Turkey, organic sales increased 2% backed by sales growth in almost all the regions. Diageo gained share in the region with continued growth in Great Britain and improved performance in Continental Europe and France. Operating profit increased 5%.
Organic sales in Africa increased 3%, with 7% volume gain due to strong gains in the premium brands. Operating profit remained flat in the region.
The Latin America and Caribbean region’s performance was modest in the first half of fiscal 2016, with 9% growth in organic sales and 4% rise in volume due to solid performances across the domestic markets. The company also increased its marketing spending by 4% to support broader participation within spirits. Operating profit increased 5% backed by lower cost of sales.
In the Asia Pacific region, sales increased 2% backed by higher sales in Australia, South East Asia, Greater China and India. Marketing expenditure decreased 2% mainly because of a significant reduction in Johnnie Walker investment. Operating profit increased 18% during the period.
Other Updates
Diageo is focusing more on spirits brands. In 2015, the company announced its decision to sell majority of its U.S. and British wine operations for $552 million to the Australian company, Treasury Wine Estates. The deal also included the sale of U.S.-based Chateau and Estate Wines, and the Percy Fox businesses based in the U.K. The proceeds were used to repay the borrowings.
Outlook
For fiscal year 2016, management expects volume growth backed by stronger top line performance. Margins are expected to improve slightly. Management also expects mid-single digit top line growth and 100 bps of organic operating margin improvement.
Currently, Diageo carries a Zacks Rank #4 (Sell). Investors interested in the beverage sector may consider Constellation Brands Inc. STZ with a Zacks Rank #2 (Buy). A couple of consumer staples stocks worth a look are Cott Corporation COT and Primo Water Corporation PRMW both carrying the same Zacks Rank as Constellation Brands.
*£1=$0.9061 (average price of the half year ended Dec 31, 2015).
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