Diageo Expects Return to Sales Growth After Two-Year Slump

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Diageo Plc forecast a return to sales growth this year, restoring guidance for the distiller’s investors after a hiatus lasting almost two years.

The outlook reflects the prospect of stronger growth in selling volumes in the 12 months through June 2016, Chief Executive Officer Ivan Menezes said in a statement Thursday. He forecast “mid-single-digit” organic sales growth in the following financial years and a 1 percentage-point improvement in the operating margin within three years.

The guidance is “conservative and undemanding,” said Eddy Hargreaves, an analyst at Canaccord Genuity in London. “It’s below what we already have in our model and it’s a positive that they have reinstated guidance.”

As he starts his third year as CEO, Menezes has tried to gain more control over his sprawling liquor empire and restore sales growth after a two-year slump. He’s bought out India’s United Spirits Ltd., taken full ownership of Don Julio tequila and dissolved a South African joint venture. Diageo is also shifting to a model focused on purchases by consumers, rather than the amount of bottles it ships to distributors.

The shares fell 0.4 percent to 1,832.5 pence at 9:37 a.m. in London. They have eased 0.9 percent this year, compared with a 17 percent increase at main competitor Pernod Ricard SA.

Previous Guidance

The company last gave guidance in 2011, under the leadership of Paul Walsh. Back then, it targeted organic sales growth of an average 6 percent in the “medium term” and said it would widen its operating margin by 2 percentage points over three years. Menezes discarded the guidance in November 2013, four months after replacing Walsh as CEO.

Results for the last financial year released Thursday showed a second year of unchanged organic revenue, broadly meeting the median estimate in a Bloomberg survey of 18 analysts. Operating profit of 3.1 billion pounds excluding one-time items was also in line with projections.

One area where the distiller exceeded estimates was the final dividend, which it increased by 9 percent to 34.9 pence, compared with a Bloomberg forecast of 33 pence.

Speaking in a television interview, Menezes said Diageo is “working closely” with the Securities and Exchange Commission after receiving an information request from the regulator this month about its distribution practices in the U.S.

The SEC request compounds the difficulties faced by the company in its biggest market. Selling volume in North America fell 3 percent in the year, hurt by declines at Smirnoff, Captain Morgan rum and Johnnie Walker whisky.

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