Diageo moves to lower end of guidance

Ostensibly, these half-year figures provide more-of-the-same, with organic net sales growth of 4.2 per cent on the back of flat volumes, while related profits increased disproportionately due to more favourable, i.e. higher margin, product mix. The disparity in reported profits was almost entirely due to a £146m gain in the comparable half-year from the sale of a portfolio of brands.

Scratch beneath the surface, however, and it’s clear that the rate of sales growth has been slowing as consumer demand has faltered in key growth markets, namely Latin America, India and the Caribbean. The emerging market anxieties don’t stop there; as the group is likely to face some disruption in its Chinese and travel retail business from the coronavirus outbreak. Sales aren’t about to fall off a cliff, but the upshot is that full-year organic net growth is now expected towards the lower end of the group’s mid-term guidance range.

Diageo, the producer of iconic liquor brands such as Johnnie Walker and Bells, has not been immune to a nascent trade spat between the US and the European Union (EU). In October, the US slapped a 25 per cent tariff on single malt whiskies from the EU. This hasn’t had a significant impact on the group’s trading performance up to now, but there is every chance this could escalate (and broaden) given Washington’s recent bellicose stance on trade affairs. This is concerning because studies have shown that consumer behaviour in the US is primarily driven by price-points, raising the spectre of substitution in favour of domestic brands.

Bloomberg consensus gives adjusted EPS of 137.7p for the year to June 2020, rising to 147.1p in FY2021.