Diageo sales disappoint as currency and comparatives leave bitter taste

LONDON (ShareCast) - Organic sales from Diageo (LSE: DGE.L - news) fell 0.7% in the third quarter, a much worse result than the increase analysts had expected, as the drinks group blamed currency headwinds in Latin America and tough comparatives in the UK. In the three months to end March, organic net sales fell 0.7%, way off the 2% City consensus forecast, dragging net sales for the last nine month down 0.3%.

Volume was down 0.8% in the quarter, resulting in a 1.7% decline in the nine month period.

In the nine month period reported total net sales growth of 4.6% as a £700m contribution from the July acquisition of United Spirits more than counterbalance a £298m adverse currency impact and a £28m hole from disposals.

Broker Shore Capital said the quarterly result does not change the broader picture of the market's expectation of a broadly flat top line performance for the year but that the new forex guidance, notably including a material move for the Venezuelan bolivar, is going to see a further small implied downgrade to forecasts.

Chief executive Ivan Menezes admitted lower inflation and weak economies "will lead to subdued net sales growth" in the current year despite the operational improvements management was pushing.

"Our performance in the quarter reflects continued tough conditions in the emerging markets and subdued consumer demand in some developed markets," said Menezes.

"However it also reflects the actions we have taken to ensure we are building a stronger business." The currency issues contributed to a 10.2% decline in LAC in the quarter and 3.3% for the fiscal year to date, while Asia Pacific was down 6% in the quarter partly as a result of the self imposed de-stock in South Asia to reduce inventory levels.

Menezes noted that consumers in North America remained resilient but that lower gas prices and a more favourable macro outlook have only seen slight growth in the spirits category and he does not expect to see shipments improve "until we have lapped last year".

North American sales were up 0.9% in the quarter, dragging the nine-monthly figure up to 0.2%.

While among the other regions, Africa was the highlight with double digit growth in Africa Regional Markets and East Africa, with Europe disappointed with a 1.3% decline in the quarter and the nine-month figure for the region down to a 0.5% fall.

"Overall, the positives are the gradual improvement in Africa and talk of improving trends in the US - albeit they have not really been seen as yet," said ShoreCap's Phil Carroll.

He believes the group remains in a period of transition "but it would appear the business still remains some way off from delivering the positive momentum required to generate upgrades potential" and therefore retain his 'hold' recommendation.

Contrasting fortunes as mainstream drinks under pressure Diageo, which saw its shares down around 2% by mid-morning on Thursday in contrast to drinks rival SABMiller (Xetra: BRW1.DE - news) 's 2% gain as it also released quarterly results.

Some industry analysts see both company's mainstream offering as being threatened by the trend towards craft products.

The mainly mainstream brands produced by Diageo and SAB are under threat from a trend towards more niche drinks, such as craft beers, according to Johnny Forsyth, global drinks analyst at market research firm Mintel.

"Consumers are avoiding what they see as generic style beers in favour of craft products, things with a story seen as smaller and more niche. That's a real real problem for SAB Miller who produce mainstream beers and that's also a problem for Diageo who have got a lot of mainstream brands. They're almost stuck in this middle area where they're not quite cheap enough or value enough for every day occasion but not quite premium enough for special occasions." He praised SAB's move away from alcohol into soft drinks as developed countries see a decline in alcohol consumption.

"SAB Miller have really changed, they're a lot more into soft drinks than they were before," he said in an interview on CNBC. "Especially in the developed world we're seeing a decline in alcohol consumption. It actually makes a lot of sense as a business to realign and not be so so dependent on alcoholic drinks."