Liquor giant Diageo (NYSE:DEO) recently unveiled its year-end financial results. Though they were positive, the U.K.-spirits maker indicated that it's facing challenges, especially in the all-important emerging economies where Diageo relies on a great deal of its incremental growth. Here's what investors need to know.
Cheers to another good year
The London-based maker of Johnnie Walker scotch whiskey and Smirnoff vodka reported that net sales rose 5% in the fiscal year ending June 30. Diageo also saw an 8% increase in operating profit. The spirits maker reaffirmed that it's on track to meet its medium-term sales target. Shares were up immediately following the announcement.
Despite increased marketing spending, weakness in emerging markets challenged the liquor maker. To capture wallet share of a bourgeoning Asian middle class, Diageo significantly ramped up spending on super- and ultra-premium-price-point Johnnie Walker labels in that region last year. Organic sales in Asia Pacific were up 3% for the year, but this was a bit of a slowdown versus the 4% reported in the first nine months. Chinese government restrictions on extravagant spending and gifting stifled sales of premium drinks in the region.
Emerging market growth is softening, but diversification helps
Diageo seeks to generate half its revenue from faster-growing economies by 2015. Yet, a slowdown in emerging markets will force the company to look elsewhere for top-line growth. Good thing for Diageo, its strength lies is in its geographic breadth, which significantly lessens the impact of individual market challenges. Diageo currently derives about 58% of sales from developed markets, and 42% from emerging markets. Overall, the year was helped by the company's broad geographic diversity, as U.S. drinkers' demand for pricey whiskey and other spirits offset slowing growth in emerging markets.
The world's largest distiller also boasts an extremely diverse product portfolio. Spirits account for more than 70% of net sales, yet no individual spirits category makes up more than 29% of company sales. The company holds industry-leading brands at every price point, giving it the ability to capture dollars as consumers trade up or down.
Despite expected slowing in emerging markets, Diageo still represents a great opportunity to buy a company with broad diversification and solid developing market presence. Its stock may not perform as well as it has in recent years, but it still trades at 18 times forward earnings, a discount compared to its alcoholic beverage rivals.