Unfavorable Fx Lowers Diageo Q3 Sales - Analyst Blog

Diageo plc's DEO sales have been affected negatively since the first quarter of fiscal 2014 by the unfavorable foreign exchange translation. The trend has continued in the third quarter reported recently. On Apr 17, 2014 Diageo reported interim management statement for the third quarter of fiscal 2014 ended Mar 31, 2014. Organic net sales (i.e. total revenue minus excise duties) declined 1.3%. Volume slipped 1.0% from the year-ago period due to unfavorable currency translations and lower consumer confidence resulting from the ongoing macroeconomic headwinds.

Segment Details

Diageo's reportable segments are North America, Western Europe, Africa, Eastern Europe and Turkey, Latin America and the Caribbean and Asia Pacific region.

During the third quarter, emerging markets witnessed soft top-line results due to weak consumer confidence resulting from the continuing unfavorable currency translations. However, results in the developed markets were in line with the first half of the year.

In Western Europe, Diageo's organic sales went up 1.2% in the third quarter as the region benefited partially from some restocking.

In North American, organic sales climbed 1.2% backed by strong business of the reserve brands. However, growth rate was slower than the previous quarter as organic sales growth was very high in the comparable quarter of the previous year.

In Africa, Eastern Europe and Turkey, organic sales declined 5.2% during the period due to slowdown in South Africa, which offset the growth in Turkey, Nigeria and Russia. In Kenya, the Senator Keg brand witnessed slow sales.

The Latin America and Caribbean delivered strong performance in the quarter, with organic sales growth of 27.7% backed by robust performance in Brazil. However, results were partly offset by weakness in Mexico and Venezuela.

In the Asia Pacific region, sales slid 19.0% organically due to negative impact from the political instability in Thailand and weaker performance in Chinese white spirits in the last three months.

The company is increasing marketing investment in all the geographical segments, with greater focus on the premium brands. The strategy of transitioning to high-margin high-priced products is improving the company's margins.

London-based Diageo, owns brands such as Johnnie Walker, Smirnoff and Guinness and has been exploring opportunities to expand geographically through acquisitions. The Zacks Rank #3 (Hold) stock has acquired companies with strong indigenous presence like Mey Içki in Turkey, ShuiJingFang in China and Halico in Vietnam in fiscal 2012.

Other stocks in the consumer staples sector worth considering are Supervalu Inc. SVU, McCormick & Company, Incorporated MKC and Mondelez International Inc. MDLZ. All the stocks carry a Zacks Rank #2 (Buy).