By Barbara Kollmeyer
MADRID (Dow Jones) -- Shares of Diageo PLC fell as much as 7%
Thursday, retreating after the world's biggest spirits maker cut
its annual profit forecast as business sustained a hard hit late
last year from the global slowdown and as management predicted a
downshift for consumer spending.
The company (DEO), whose well-known brands range from Smirnoff
vodka and Johnnie Walker whiskey to Captain Morgan rum and Guinness
beer, said net profit rose 16% to 1.14 billion pounds ($1.63
billion) from 975 million pounds in the six months ended Dec. 31,
helped by exchange-rate movements.
But that number fell short of the consensus view of 1.65 billion
pounds expected by 10 analysts who were surveyed by Dow Jones.
Net sales over the six months totaled 5.07 billion pounds, an
increase of 18% from 4.29 billion pounds a year ago, which was
within expectations.
Investors were taken aback as London-based Diageo cut its growth
forecast for full-year operating profit to a range of 4% to 6%,
down from a prior range of 7% to 9%.
Paul Walsh, the company's chief executive, said that the global
slowdown hit the company particularly hard in November and
December.
"Current economic trends indicate that consumer confidence will
reduce further and the outlook for the second half is more
difficult to predict," he said.
Shares of Diageo traded down 5% to 8.61 pounds in London, and
over the past 12 months have fallen 18%. U.S.-listed shares fell on
a similar scale in early New York action.
Diageo also said that it won't reopen its share-buyback program
in the coming year and that it would introduce a restructuring
program in the second half. The program's expected to save the
company 100 million pounds, largely accrued in fiscal 2010.
As a result, the company will take an exceptional charge of 200
million pounds in the second half. However, Diageo said continued
positive currency translations and a lower tax rate will mean
double-digit growth in reported earnings per share after the
exceptional item.
Surprisingly quick deterioration
Nico Lambrechts, research analyst with Merrill Lynch, said the
slashed profit forecasts for Diageo come as an even bigger
disappointment.
Management "remained fairly confident in their communications to
the market as late as December last year," he said, adding that
markets won't like that it cited a big hit on its business in
November and December.
A cut in advertising and promotional spending as well as falling
volumes in Europe and in the international division will also be
viewed negatively by the market, the analyst said. Merrill
maintains a neutral rating on Diageo.
However, Richard Hunter, head of U.K. equities at Hargreaves
Lansdown Stockbrokers, said the market's reaction is judging
potential rather than actual performance. He noted shares are down
just over 9% in the last six months, not nearly as bad as the drop
of 23% for London's benchmark FTSE 100 index .
"The first-half performance exceeded most analysts'
expectations, with a particular benefit coming from the weakness of
the pound against the dollar," said Hunter. "Even so, the actual
volume of growth in the key U.S. market for Diageo has slowed
markedly.
"Furthermore, the management has decided to downgrade the
outlook for the operating profit on a particularly difficult market
to call, and has clearly gone for safety in market expectations
rather than aggressive growth."
He said that the growth downgrade will weigh on share
performance over the shorter term but that the strength and
diversity of the company's operations will continue to provide some
support.
Tough all over
Diageo's international region, which composes Africa and Latin
America, saw six-month revenue increase 18%.
Guinness sales drove a 25% improvement in African revenue, as
Nigeria has proved to be a bigger consumer of Guinness than the
home market of Ireland.
Its top market by sales, North America, saw revenue climb by 33%
-- but by just 4% when excluding currency movements and deals.
Volumes edged 2% on a comparable basis, as operating profit by
that measure rose 7%.
Unsurprisingly, it's been tough going for companies under the
consumer umbrella as the global economy compels consumers to
tighten up their spending on food and drink.
Fortune Brands (FO), for one, swung to a fourth-quarter loss on
dwindling revenues, though its liquor business helped prop up the
rest of the company.
Last week, Dutch consumer-goods giant Unilever PLC decided to
scrap its forecast for 2009 altogether and abandon targets for
2010.
Nestle is due to report results next week, and there are some
jitters over whether the consumer-products giant can achieve profit
aims.