It’s hard to recall a set of full-year results more eagerly anticipated than those delivered by Diageo on Tuesday.
Just weeks after the sudden departure of boss Debra Crew, markets were keen to understand what had prompted Diageo’s board to part ways with its CEO – despite the Smirnoff supplier broadly outperforming competitors in spirits in recent quarters.
As it turned out, there were few major shocks in the results, with both organic sales growth and adjusted operating profit broadly in line with analysts’ expectations. Diageo did elect to up its cost savings target from $500m to $625m, however, after identifying further opportunities to drive efficiencies and cash generation.
“Our results are in line with guidance; we have delivered what we said we would deliver,” interim CEO Nik Jhangiani told journalists on Tuesday morning. “We are encouraged by areas of progress, but I, the executive team and the board know there’s much more to do.”
So far, so unsurprising – but what else did we learn?
‘Concerning’ profit dip
The standout number in Diageo’s headline figures was undoubtedly a 27.8% slide in reported operating profits, which well exceeded analysts’ expectations of a 10% fall.
However, it is important not to draw too many conclusions from the dip. Diageo attributed it to unfavourable foreign exchange rates and a decline in operating margin, alongside “exceptional impairment and restructuring costs”, including a $231m impairment related to gin brand Aviation, acquired for up to $600m in 2020, and a $220m hit from the disposals of Guinness operations in Ghana and Nigeria.
Restructuring a supertanker the size of Diageo was always going to incur certain costs. And by taking the hit on some of its underperforming brands now, the company is setting itself up for a more realistic and predictable future.
“The decision to take significant impairments may well be a way of giving [Crew’s] permanent successor, when appointed, the best possible opportunity to succeed,” postulates AJ Bell investment director Russ Mould.
The markets certainly weren’t spooked by the profit slide, which Diageo had pre-empted in its half-year results. Indeed, news of the expanded cost savings target actually sent Diageo shares up by high-single digits in morning trading – before sliding back to around 4% up by mid-afternoon.
In further positive news, Diageo’s five major markets were in organic sales growth – an achievement you’d be hard-pressed to find matched at any of its major rivals.
Cost savings clarity needed
After Diageo announced plans to save $500m in costs over the next three years, questions immediately surfaced about the possibility of major job cuts. After all, many of Diageo’s peers have been shedding staff as they grapple with macroeconomic uncertainty, the threat of tariffs and consumers cutting back on drinking.
Those questions were bound to resurface again after Jhangiani boosted the cost savings target by 25%. But the former CCEP finance boss insisted that – while there would be some restructuring – the plans were “really not about job cuts or elimination of roles”.
Instead, Diageo would make the savings by reducing overheads as well as marketing and supply chain efficiencies, he said. “This is about freeing up resources and dollars where we can reinvest for the business.”
While some examples of this cost-saving have been given – such as regional operating changes and an increased use of AI in marketing – more clarity on where the bulk of savings will come from is sorely needed, especially as the substantial disposals promised are yet to materialise.
New CEO by October
Despite only joining Diageo last September, Jhangiani is thought to be among the frontrunners to replace Crew as CEO on a full-time basis.
He began the call on Tuesday by paying tribute to his predecessor, thanking her for her work at Diageo since 2019 and wishing her best for the future. It was slightly awkward, however, to hear him being asked when Diageo could expect to appoint a successor.
Jhangiani said he was “very humbled” to have been asked to step in as interim CEO and was currently “very focused” on the job at hand.
“The board is moving at speed to make the right decision would expect that probably towards the end of October,” he added.
Tariff threat is receding
The threat posed by US tariffs was cited as a major reason for Diageo abandoning its long-held medium-term annual sales growth targets earlier this year. Since then, the US tariff picture has become clearer, with the UK and US agreeing to a trade deal with 10% tariffs and the EU agreeing to duties of 15%.
Diageo’s business is well set up to cope with US tariffs as they stand. All of its scotch is produced in the UK and its Mexican and Canadian imports into the US remain exempt under the US-Mexico-Canada Agreement (USMCA). It was also bolstered by the UK free-trade agreement signed with India earlier this year, and has limited direct exposure to cognac – now subject to new levies in China.
The estimated impact of tariffs is now estimated to be around $200m on an annualised basis, Diageo said on Tuesday. The business had already taken “a number of actions to help mitigate the potential impact including inventory management, supply chain optimisation and reallocation of investments”, it said, adding that it expects to be able to offset around half of the hit before taking any pricing action.
Despite this, Diageo would be mindful of US consumer sentiment before upping prices, Jhangiani said.
“The beauty of Diageo is that we operate across multitude of markets, with brands and portfolios that serve the occasions where we can continue to test consumer elasticity,” he added.
Diageo remains bullish on Gen Z
The decline in alcohol consumption globally – alongside the increasing uptake of GLP-1 inhibitors – have been widely trumpeted as existential challenge for alcohol suppliers to overcome. Last year, fund manager Terry Smith dumped his stake in Diageo, citing the threat to demand posed by weight-loss drugs.
“Investors are in something of a quandary with Diageo,” says Mould. “They need to determine if the downturn in alcohol consumption is a short-term effect of squeezed disposable income or the start of a broader trend away from drinking altogether for health and lifestyle reasons.”
On Tuesday, Jhangiani hit back at assertions that alcohol was in structural decline. He said consumers were “not socialising any less” and spirits consumption remained stable, gaining share from beer and wine, he insisted, pointing out that spirits penetration was up six percentage points since 2020 among Gen Z consumers.
And while Diageo was “keeping a close eye on the impact of cannabis and GLP-1” on demand for booze, early US consumer data reinforced its view that “the impact to date has not been significant”.
Diageo intended to manipulate moderation trends to its advantage through increasing its participation in lower-alcohol RTDs, and continuing to invest behind alcohol-free versions of its bestselling brands, Jhangiani added.
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