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Diageo (DEO) First Half 2017 Sales Gain on Higher Volume

Diageo plc'sDEO earnings in first-half fiscal 2017 increased 21% (in local currency) year over year to 61.7 pence (78.4 cents* per share) from 51.3 pence (86 cents* per share) driven by higher sales.

On an organic basis, net sales increased 4.4% backed by volume growth and positive price mix. Volume increased 1.8% on an organic basis.

Reported net sales (i.e. total revenue excluding excise duties) gained 14.5% in local currency in first-half fiscal 2017. Operating profit before exceptional items (excluding acquisitions and disposals) went up 4.4% year over year on an organic basis.

Segment Details

In North America , organic sales gained 3%, driven by strong performance in each market - US Spirits, Diageo Beer Company USA and Canada.

Operating profit increased 26% in the reported period. Operating margin inflated 131 basis points (bps) as backed by higher gross margin coupled with marketing efficiencies, and zero-based budgeting lowering costs.

Sales gain of spirits and Ready-to-Drink partially neutralized decline in beer sales during the period.

In Europe, Russia and Turkey , organic sales increased 5%, backed by sales growth in almost Continental Europe. Diageo gained share in the Europe with continued growth in Great Britain and improved performance in Continental Europe.

Operating profit increased 19%, while operating margin in the region inflated 37 bps primarily due to the continuing productivity work and positive price/mix.

While sales of beer remained same, that of spirits gained 6%. However, sales of Ready-to-Drink declined 5% in the region.

Organic sales in Africa increased 4%, with 3% volume growth owing to strong gains in the premium brands. Operating profit declined 4% in the region, while operating margins decreased 37 bps primarily due to the impact of adverse mix in Nigeria and East Africa.

Marketing gained3% in the region with investment being focused on key campaigns including Satzenbrau Smart Choice.

The Latin America and Caribbean region's performance was sturdy in first-half fiscal 2017, with 11% growth in organic sales backed by solid performances across the Mexico, Andean and CCA was offset by weak performance in Brazil. Operating margin increased 60 bps, primarily driven by positive mix, lower marketing spend in Brazil and marketing efficiencies in Colombia.

Marketing spend declined 6% with reductions in Brazil partially offset by increased spend in Mexico. In Mexico, the company focused on driving scotch performance through Johnnie Walker.

In the Asia Pacific region, sales increased 3% backed by higher sales in Australia, South East Asia, Greater China and India, partially neutralized by decline in North Asia and Travel Retail in Middle East and Asia. Operating profit increased 11%. Adjusted operating margin inflated 43 bps, due to positive mix and productivity initiatives .

Management reduced marketing expenditure by 6%, due to lower market in Korea and Thailand.

Other Updates

Diageo is focusing more on spirits brands. In fiscal 2016, 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. Further, the deal 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.

The company hiked its interim dividend by 5% to 23.7 pence.

Outlook

Management expects volume growth backed by stronger top-line performance. Margins are expected to improve slightly. Moreover, management expects mid-single digit top-line growth and 100 bps of organic operating margin improvement by 2019.

Bottom Line

We note that Diageo, which shares space with companies like Molson Coors Brewing Company TAP and Boston Beer Inc. SAM , is making efforts to focus on its spirits business, as a result of which it has planned to divest non-core assets.

However, increasing restrictions on alcohol consumption by governments worldwide have dented revenue growth for the industry as a whole. The shares of the company gained 4.7% in the last three months, outperforming the Zacks categorized Beverages Alcohol industry which has dropped almost 6.6% in the same period.

Zacks Rank & Key Pick

Diageo currently carries a Zacks Rank #3 (Hold).

A better-ranked stock in the same sector includes Constellation Brands Inc. STZ carrying a Zacks Rank #2 (Buy) and has an expected long-term growth of 19%. You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here.

*£1=$1.27 (average price of the half year ended Dec 31, 2016).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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