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Diageo (DEO) Looks Well-Positioned on Robust Demand Trends

Diageo (DEO) is poised to benefit from improving consumer demand trends. Its efforts to expand the digital business and investments in RTDs bode well.

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This story originally appeared on Zacks

Diageo Plc DEO looks well-poised, owing to the recovery in consumer demand across markets. Strong consumer demand, market share growth in the spirits category and positive category mix have been aiding the top line. Its recent investments in the ready-to-drink (RTD) category have further buoyed optimism on the stock.

In fiscal 2021, organic sales advanced 16%, backed by strong growth across all regions, led by gains in North America, the company’s largest market. All regions reported organic net sales growth, driven by strong consumer demand in the off-trade channel and a partial recovery of the on-trade channel in the key markets. Organic sales also benefited from the lapping of the reduced inventory levels by customers in fiscal 2020.

The Zacks Rank #1 (Strong Buy) stock has rallied 32.6% in the past year compared with the industry’s growth of 4%. Also, the company’s shares have comfortably outpaced the Zacks Consumer Staples sector and S&P 500’s growth of 7.5% and 23.7%, respectively.

The Zacks Consensus Estimate for its current financial year’s sales and earnings suggests growth of 31.1% and 13.6%, respectively, from the year-ago period’s reported numbers.

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Here's Why Diageo Should Retain the Momentum

Diageo is anticipated to retain its strong performance on robust consumer demand as bars and restaurants reopen on the easing of lockdowns, driving the replenishment of stocks at bars and restaurants. Robust demand for its tequila brands and Johnnie Walker whisky have been the key drivers. The company expects market growth in North America to return to the historical levels of mid-single digits in fiscal 2022. Growth is likely to be driven by the benefits of lapping soft on-trade comparisons.

However, the company expects off-trade consumption growth to be slightly slow-paced in fiscal 2022. It is also likely to benefit from continued investments in marketing and innovation to capture organic sales growth in its well-positioned portfolio of premium brands.

Diageo is relentlessly working to leverage its existing e-commerce capabilities and accelerate investments in the online platform to cater to the pandemic-driven shift in consumer shopping behavior. As the online platform has become more relevant amid the pandemic, the company has diverted its efforts to connect with consumers and maintain brand relevance by responding to increased opportunities for at-home consumption occasions. This included new occasion like wanting to enjoy bar-quality drinks at home.

The company has inspired consumers with cocktail recipes, new serves and ways to enjoy its brands with food. It also rapidly responded to increased demand for home delivery. In the United States and Latin America, it reached customers with new “cocktail to go’ programs. In East Africa, the company explored new ways to get products delivered to consumers’ homes through partnerships with motorbike delivery companies known as boda-bodas.

The company expects organic sales momentum to continue in fiscal 2022 due to the resilience in the off-trade channel as well as recovery in on-trade, offset by potential impacts of future COVID-19 wave and continued disruption in Travel Retail. The company expects the operating margin to improve in fiscal 2022, driven by a further recovery in sales volumes, positive channel mix and premiumization trends. It expects its focus on everyday efficiencies and revenue growth management to offset the impacts of rising inflationary pressures. The interest expense rate is anticipated to be 2.7-3%.

Other Stocks to Watch

We have highlighted some other top-ranked stocks from the broader Consumer Staples space, namely The Boston Beer Company SAM, The Duckhorn Portfolio NAPA and Hershey HSY.

Boston Beer currently carries a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 4.3%, on average. The SAM stock has lost 44.7% in the past year.

You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Boston Beer’s current financial-year sales and earnings per share suggests growth of 26.1% and 11.8%, respectively, from the year-ago period's reported numbers.

Duckhorn Portfolio currently has a Zacks Rank #2. The company has an expected long-term earnings growth rate of 10.9%. Shares of NAPA have gained 29.7% in the past year.

The Zacks Consensus Estimate for Duckhorn Portfolio's current financial-year sales suggests year-over-year growth of 7.9%. The consensus mark for earnings per share remains flat with the year-ago period's reported figure.

Hershey currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 4.4%, on average. Shares of the company have gained 30.4% in the past year.

The Zacks Consensus Estimate for Hershey's current financial-year sales and earnings per share suggests growth of 8.9% and 12.7%, respectively, from the year-ago period's reported numbers. HSY has an expected long-term earnings growth rate of 7.7%.



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Hershey Company The (HSY): Free Stock Analysis Report

 

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