In theory, Diageo should boast high operational gearing, but it isn’t evidenced by these results: overall organic sales growth was just two per cent, while organic profits grew by exactly the same amount.
This was partly due to higher marketing spend, which was increased by 50 basis points (pretty expensive marketing when you consider the anaemic sales growth).
However, the main drag on profitability was stubbornly sluggish trading conditions in North America, which still accounts for a worrying 40 per cent of profits, and Europe. In these regions, customers are shunning premium brands, or buying them in supermarkets and off-licences, where Diageo’s margins are much lower. In North America, net sales were off three per cent while Europe dipped by two per cent.
These results don’t inspire confidence, and management is far from bullish on the firm’s prospects, promising “improved” organic profit growth in the year ahead (an effective downgrade to the four to five per cent pencilled in by analysts).
In the long-term, Diageo will come good. Emerging markets are falling in love with prestige alcohol brands, and iconic products like Guinness will thrive. But rising unemployment and spluttering economies in Diageo’s biggest markets make it impossible to recommend these shares.