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Diageo Keeps Walking as Activists Push Consumer Giants on Profit

Updated on
  • Johnnie Walker sales grow as Americans embrace cocktail hour
  • Scotch gains in U.S., but Ciroc, Ketel One vodkas struggle

As activist investors stalk the world’s largest consumer giants, Diageo Plc is trying to stay ahead by lifting earnings, reducing expenses and accelerating a turnaround in mammoth brands such as Johnnie Walker whisky.

Benefits from productivity initiatives will continue in the second half and Diageo expects to make good progress toward a goal of expanding its profit margin, Chief Financial Officer Kathy Mikells said on a call. The shares rose after the company reported a 6 percent increase in first-half operating profit to 2.2 billion pounds ($3.1 billion), beating analyst estimates.

The maker of Smirnoff vodka and Guinness stout has joined companies such as Unilever and Nestle SA in cutting costs as private-equity firm 3G Capital and hedge-fund investors Nelson Peltz and Dan Loeb lobby for greater shareholder returns at consumer-goods giants wrestling with slow growth. Diageo is tapping the experience of Lion Capital LLP and Bacardi veteran Javier Ferran, who became chairman of the world’s largest distiller last year.

“Diageo is a business in change, with catalysts provided by Chairman Ferran and the perceived threat of 3G,” Jefferies analyst Ed Mundy wrote in a note. “We see a perfect blend of productivity and top-line growth.”

Diageo’s organic net sales rose 4.2 percent in the six months ended Dec. 31, topping the 3.7 percent median analyst estimate, the London-based company said in a statement Thursday. Americans leading a revival of the classic cocktail boosted sales of brands such as Johnnie Walker, Bulleit bourbon and Don Julio tequila in North America, Diageo’s largest region for revenue.

“Diageo is much fitter,” Chief Executive Officer Ivan Menezes said in an interview with Bloomberg TV. “Our productivity program is driving well.”

Other highlights include:

  • The shares rose as much as 2.3 percent, the most since August
  • Diageo warned that exchange-rate movements for the year ending June 30 will cut net sales by around 460 million pounds and operating earnings by about 60 million pounds
  • Vodka sales in North America were a sore point, falling 8 percent amid weak demand for the Ciroc and Ketel One brands
  • Diageo reiterated its commitment to delivering consistent mid-single-digit top-line growth and 175 basis points of organic operating margin improvement in the three years ending June 2019
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