Diageo Posts Higher Profit, Sees Key Brands Post Declines

| About: Diageo plc (DEO)

Diageo Plc.’s (NYSE:DEO) fiscal 2010 net income from continuing operations grew 1.5% to £1.63 billion ($2.58 billion) from £1.61 billion in the year-ago period. Earnings per share came in at £0.65 ($4.11 per ADR), compared to £0.64 per share in the year-ago quarter.

Net sales recorded growth of 5% year-over-year to £9.78 billion ($15.48 billion). Excluding the impact of foreign exchange, acquisitions and disposals, organic sales logged a growth of 2%. Volumes also grew 2% year-over-year to 143.4 million of equivalent units.

In North America, Diageo’s net sales were essentially flat year-over-year at £3.31 billion ($5.23 billion) as benefits from favorable foreign currency translations and acquisitions were offset by a decline in organic sales. The region was adversely affected by continued macroeconomic headwinds and sluggish consumer confidence. Diageo recorded volume declines across all key brands, except Johnny Walker and Guinness, which grew by 5% each.

In Europe, net sales remained almost flat at £2.76 billion ($4.37 billion) from £2.75 billion in the prior-year quarter. Diageo witnessed strong growth in Great Britain and Russia. However, Spain, Greece and Ireland witnessed lackluster performance. In terms of key brands, Johnnie Walker volumes declined 6%, while J&B and Guinness fell 8% and 4%, respectively.

In the International segment, Diageo’s net sales rose by 15% year-over-year to £2.63 billion ($4.16 billion) primarily due to strong performance in Latin America and Africa. In terms of key brands, Johnnie Walker volumes jumped 22%. Smirnoff volumes posted a growth of 7% year-over-year, while Buchanan’s rose 11%.

In the Asia-Pacific region, net sales grew by 12% year-over-year to £1.02 billion ($1.61 billion) almost entirely due to favorable currency movements. Diageo posted double-digit growth in South East Asia, driven by Guinness and Johnnie Walker brands, while scotch witnessed growth in China. However, sales growth in the region was partially offset by declines in Australia and Korea.

Diageo’s gross profit during the quarter increased 4.9% year-over-year to £5.68 billion ($8.99 billion), while gross margin dipped marginally by 10 basis points (bps) to 58.1%. Total operating expenses rose 3.6% year-over-year primarily due to higher marketing spend to support key brands. Diageo’s operating income posted a 6.5% growth to £2.57 billion ($4.07 billion) from £2.42 billion in the year-ago period.

At the end of fiscal 2010, Diageo had cash and cash equivalents of £1.45 billion ($2.19 billion) and borrowings of £8.18 billion ($12.32 billion). During the fiscal, the company generated £2.30 billion ($3.46 billion) and deployed £914 million ($1.38 billion) towards dividend payments, £422 million ($636 million) towards debt repayment and £374 million ($564 million) towards capital expenditure.

Diageo currently has a Zacks #3 Rank (short-term Hold rating) and a long-term Neutral recommendation.