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At whisky tastings, drinkers are often asked to observe colour and clarity to determine quality. Diageo’s annual results provided plenty of the former, with boss Debra Crew calling the consumer environment “extraordinary”, as the drinks group suffered its first global drop in sales since 2020.
But there was an almost total lack of clarity about when conditions might improve. A vague statement about how the maker of Johnnie Walker Scotch is “confident that when the consumer environment improves, organic net sales growth will return” didn’t go down well, sending the shares down 7 per cent on the day.
Crew has a wider problem than a cyclical downturn. Some investors are still sore from a shock profit warning in November, caused by high stock levels and weak consumer demand in Latin America — something Diageo should have been alive to much earlier. This combination of uncertainty and distrust in management makes for an unpalatable cocktail for Crew.
On the one hand, she might feel vindicated by the events of recent weeks. Other consumer companies are starting to report sales declines, which hit much earlier in the US spirits market. Volumes of spirits sold in the US fell in 2023 for the first time in almost 30 years, according to IWSR.
That doesn’t get Diageo off the hook though. It was slow to react last calendar year to a deepening slump in Scotch whisky sales in countries such as Brazil and Mexico and was still pushing stock into the market when it could not be absorbed.
Crew has sought to correct this. Inventory levels in Latin America, she said, were now back to more “appropriate levels” versus demand.
The big worry now is the US, where Diageo gets almost 40 per cent of its sales. Organic net sales dropped by a worse than expected 3 per cent in the year to June 30 owing to the weak consumer environment. Earlier this year, Crew said this could last six to 18 months. This time she was unwilling to commit to a timeline.
Diageo does have some positives to toast. Assuming a mid-single digit decrease to earnings forecasts following the latest results, it is still cheap — trading at around 16 times forward earnings. This compares with an average closer to 18 times for the wider European sector. Its defence of market share in key regions should stand it in good stead when the upswing arrives.
But it is asking investors to just hold their noses and drink for an undefined period — and that is enough to make anyone nauseous.
