Diageo disappoints, weighed near-term by Asia

<p>Shares of Diageo have taken a hammering today (17th April), following the company’s third quarter trading update. For the three months ended 31st March, Diageo […]</p>

Shares of Diageo have taken a hammering today (17th April), following the company’s third quarter trading update.

For the three months ended 31st March, Diageo reported a 1.3% decline in overall revenue, with sales in Asia Pacific plunging the most, at 19%.

Meanwhile, adverse foreign currency movements (yep, we’ve heard this elsewhere from a variety of global players) are set to dent the company’s operating profit for its fiscal year by some £330m.

That update sent Diageo’s shares down around 4% (at time of writing), making the company one of the worst performers on the FTSE 100 today.

Diageo’s woes in Asia

The UK-based company cited political instability in Thailand, as well as weaker performance in China as reasons for the negative performance in Asia Pacific.

On the China front, it’s no secret that the region’s recently proved challenging for Diageo – and its peers, including Rémy Cointreau and Pernod Ricard – whose portfolio includes so-called high-end alcoholic beverages.

That’s predominantly thanks to the government crackdown on luxury gift giving and extravagant spending by civil servants, together with a slowing economy.  That, in turn, has hampered the good growth previously enjoyed by these companies in China.

In fact, earlier today, Remy warned that its profit for the year would likely decline by up to 40%, as sluggish demand in China continues to take its toll. LVMH has also reported a decline in sales in its alcohol business due to the crackdown.

Is it all doom and gloom for Diageo?

Not quite.  Diageo’s sales in Latin America and the Caribbean soared a notable 28% in the quarter, while sales in North America – its largest market with around 25% of total revenue and a significant 42% of last year’s pre-tax profit – grew 1.2% in the period.

Meanwhile, the company’s effort to boost its foothold in other regions bodes well. Earlier this week, the company put in an offer of around £1bn to increase its stake in India-based United Spirits by 26%.

A successful outcome would see Diageo holding a majority stake (around 55%) in United Spirits.  And the company’s not averse to further deals (albeit having publicly stated it’d be at a slower pace), as it continues to broaden its reach.

Make no mistake: Diageo does have a solid footing and should soon recapture decent growth

With a portfolio encompassing strong brands; such as Smirnoff vodka, Baileys Irish Cream, Johnnie Walker Scotch and Guinness, Diageo’s story certainly remains sound.  Headlines regarding sector-wide issues in Asia, however, won’t help the company’s shares in the short term.

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