Diageo (LON:DGE) plc’s (NYSE:DEO) earnings in fiscal 2016 (ended Jun 30, 2016) gained 1.0% (in local currency) year over year to 89.4 pence ($1.32* per share) from 88.8 pence ($1.37* per share) in the year-ago period backed by organic profit growth, higher associates income and lower finance charges.
Unfavorable retail conditions in the emerging markets hindered profit during the fiscal year.
On a reported basis, net revenue (total revenue excluding excise duties) slipped 3% in local currency in fiscal 2015. Unfavorable exchange and disposals more than offset organic growth in each region and accretion from acquisitions. Volume growth in reserve brands was offset by a decline in beer and scotch in the emerging markets. As a result, overall volume remained flat year over year.
On an organic basis, net sales inched up 3% to £276 million ($4.1 billion) backed by sales gain in all the geographic regions. Volumes rose 1% on an organic basis.
In fiscal 2015, Diageo witnessed 2% decline in marketing spending, on an organic basis. Operating profit before exceptional items (excluding acquisitions and disposals) went up 3% year over year, on an organic basis.
Segment Details
In North America, organic sales grew 3% in fiscal 2016 due to 2% higher sales in all segments. Net sales also increased on the back of 6% growth in North American whiskey, as Crown Royal and Bulleit continued to gain share in the category. Marketing spending decreased 2% in the region, primarily due to focused spending and procurement efficiencies. Advertising was focused on US Spirits, with investment in Smirnoff, Crown Royal and Captain Morgan and fast growing brands such as Don Julio, Bulleit and Buchanan’s.
Operating margin expanded 39 basis points (bps) due to higher gross margin and lower marketing spend.
In Europe, Russia and Turkey, organic sales inched up 4% on higher sales in all regions. Volumes grew 4% in Europe, partly offset by volume decline in Russia and Turkey. Operating margin improved 51 bps due to higher gross margins in both Europe and Russia. In Europe, procurement savings offset increased marketing and overheads.
Organic sales in Africa increased 3%, with 9.3% volume gain due to strong gains of premium brands. Marketing spending was up 1%, particularly on brand building initiatives. Operating margin contracted 252 bps primarily due to adverse mix and volume decline in Nigeria.
The Latin America and Caribbean region’s performance was modest in the fiscal year with only 1% gain in organic sales. However, volumes declined 2%. The company also increased its marketing spending by 6% to support broader participation within spirits. Investment in scotch was focused on enhancing brand equity across price points in Mexico. Operating profit dipped 2% as higher overheads overshadowed gross margin improvement due to higher procurement savings.
In the Asia Pacific region, sales gained 2% backed by growth in India, South East Asia and Australia. Volume remained flat as higher volume in South East Asia, North Asia and Australia was offset by volume decline in Greater China and Middle East.
Marketing spend declined 12% due to reduced spending on Johnnie Walker Black Label and Johnnie Walker Blue Label in China and India. This was because marketing in these areas reduced as a result of termination of USL-related party agreements.
Other Updates
Diageo is expanding fast into the emerging markets. The company has acquired ownership in United Spirits Limited, a leading spirit company of India. Moreover, during fiscal 2015, the company gained full control of the tequila brand, Don Julio, in an attempt to boost its presence in the premium tequila category.
Currently, Diageo carries a Zacks Rank #3 (Hold). A better-ranked stocks in the same sector is Constellation Brands Inc. (NYSE:STZ) , which holds a Zacks Rank #2 (Buy). Two other consumer staples stock worth considering includes Altria Group Inc. (NYSE:MO) and Post Holdings Inc. (NYSE:POST) also holding a Zacks Rank #2.
*£1=$1.48 (average price of the year ended Jun 30, 2016).
**£1=$1.55 (average price of the year ended Jun 30, 2015).
DIAGEO PLC-ADR (DEO): Free Stock Analysis Report
ALTRIA GROUP (MO): Free Stock Analysis Report
CONSTELLATN BRD (STZ): Free Stock Analysis Report
POST HOLDINGS (POST): Free Stock Analysis Report
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