High Times for Diageo

The owner of alcohol brands such as Johnnie Walker and Guinness had a flush year, and it predicts the profits will just keep rolling

Investors are raising a glass to Diageo. The owner of Johnnie Walker whisky, Smirnoff vodka, and Guinness stout on Feb. 15 raised its profit forecast on strong demand for its booze and brews. That sent shares in the world's largest drinks group up more than 2%.

Diageo (DEO) says it now expects full-year growth of 8%, compared with a previous forecast of 7%. The company reiterated that it will complete a £1.4 billion ($2.73 billion) share buyback program for the financial year, which ends in June.

The higher estimate came as the company said first-half profit fell 23%, to £895 million ($1.75 billion), from £1.2 billion ($2.34 billion) a year earlier. But the year-earlier figure was boosted by a one-off gain from the sale of a stake in General Mills (GIS). Group operating profit rose 3.5%, to £1.3 billion ($2.54 billion), from £1.26 billion ($2.46 billion), driven by strong sales in North America and fast-growing markets such as China and India. Group sales rose 2%, to £4.02 billion ($7.85 billion), in the period ended Dec. 31, from £3.96 billion ($7.73 billion) a year earlier.

Quality Scotch

"Excellent performances in North America and International and unchanged profits in Europe delivered double-digit underlying earnings growth," Chief Executive Paul Walsh said in a statement. "As a result of this strong start, we are increasing our guidance" for the full year, he added.

The London-based drinks group has redoubled marketing efforts in key growth regions such as China and Latin America to boost market share. It's paying off: The company said it gained ground in those areas in the period, thanks to the popularity of its Scotch brands, which also include premium labels such as Buchanan, Oban, and Talisker. The company is earmarking £100 million to build an additional whisky distillery in Scotland and expand existing sites.

The company's International arm, which incorporates fast-growing markets such as Latin America, Asia, and Africa, chalked up a 16% rise in net sales, to £1.31 billion ($2.56 billion). In China alone, market share increased by 0.8 percentage points in the period, thanks to the popularity of Johnnie Walker. Operating profit rose to £413 million ($807 million), from £371 million ($725 million). European sales declined 2% in the period, as gains on the Continent were offset by weakness in Britain, Spain, and Ireland.

Confidence Gain

First-half sales in North America grew 7%, to £1.31 billion ($2.56 billion), as Diageo's share in the spirits market (by volume) jumped 1.2 percentage points, the company says. Operating profit rose to £486 million ($949 million) from £476 million ($930 million), driven by demand for Smirnoff, Johnnie Walker, and Captain Morgan rum, the company said. Diageo also raised prices on some brands to offset the impact of a weakening dollar.

The new forecasts point to "an increased confidence in the group's ability to gain share," Credit Suisse analysts wrote in a note to investors. Market share gains in countries including the U.S. and China, meanwhile, show Diageo has "raised the ante on performance," they added.

The shares rose 24 pence, or 2.4%, to 1,045 pence ($20.41) in trading on the London Stock Exchange. The company's ADRs were up $1.21, or 1.5%, to $82.25 in early trading on the New York Stock Exchange.

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