Diageo Faces Pressure to Reassess Sales Goals
Diageo's newly appointed Chief Financial Officer Nik Jhangiani is expected to announce next week whether the company will revise its medium-term sales targets, considered by some investors as overly ambitious amid industry-wide sales decline.
During Jhangiani's first earnings report since assuming the role in September 2023, he will either reaffirm the 5-7% annual sales growth targets set in 2021 or acknowledge their potential impracticality.
Investors, including Kai Lehmann of Flossbach von Storch, a major Diageo shareholder, express skepticism about the achievability of the 7% target. Lehmann believes it is unlikely to be attainable in the near to long term.
The company's recent profit warning, triggered by excess inventory buildup in Latin America, has eroded investor confidence. Since then, the sector has faced continued sales decline due to inflation and interest rate hikes, forcing consumers to reduce spending on discretionary items. CEO Debra Crew previously expressed uncertainty about the timing of a recovery to the 5-7% sales growth trajectory.
Some analysts and investors also raise concerns about long-term industry threats, including reduced drinking due to increased weight-loss drug usage and potential US tariffs on key products like tequila.
Despite acknowledging the current economic challenges, some investors, such as Joseph Gabelli of Gabelli Funds, view Diageo's challenges as stemming from temporary trends rather than fundamental shifts. They emphasize the company's strong positioning for future growth, particularly its strategy to drive consumption towards premium products.
However, others, like Kunal Kothari of Aviva Investors, suggest that the premium portfolio's contribution to growth may slow as it now accounts for over 70% of sales in developed markets. Diageo's cyclical nature should also be considered in setting long-term targets.
Barclays, Jefferies, and RBC Capital Markets predict that Diageo will lower its medium-term guidance next week.