Diageo has a taken £1.3bn writedown as it reported a worse-than-expected fall in annual sales due to the temporary closure of bars and restaurants during the pandemic.
The world’s largest spirits maker, which owns brands such as Johnnie Walker, Smirnoff vodka and Guinness, said the non-cash charges related to its businesses in India, Nigeria, Ethiopia and the Windsor whisky brand in South Korea, “reflecting the impact of Covid-19 and challenging trading conditions”.
Over the year to 30 June, Diageo’s reported net sales were down 8.7% to £11.8bn, driven by organic declines. Reported operating profit plummeted 47.1% to £2.1bn due the exceptional operating items and the weakness in sales during the final months of the reporting period.
Organic net sales were down 8.4%, with growth in North America (+2%) more than offset by declines in all other regions such as Africa (-13%), Europe and Turkey (-12%), and Asia Pacific (-16%). However, the UK business appears to have got off relatively lightly with sales down only 4% after a solid first half and increased demand in the off-trade during the pandemic.
Chief Financial Officer Kathryn Mikells said the robust results in North America, its biggest market by revenue, was because 80% of Diageo’s sales came from retail stores, in contrast to other markets, where bars and restaurants make up most of the sales.
Some of its brands performed relatively well with net sales of tequila in North America up 36%, reflecting the fast-rising popularity of its Don Julio and Casamigos lines. Meanwhile, drinkers in Europe turned to rum, where sales rose 3%, driven by the Captain Morgan brand.
Other alcoholic drinks makers have also taken impairment charges during the pandemic. Brewer giant AB InBev took a $2.5bn writedown on the value of its operations in Africa last week, whilst Heineken has written down the value of its assets by €550m.
Diageo’s Chief Executive, Ivan Menezes, said: “Fiscal 20 was a year of two halves: after good, consistent performance in the first half of fiscal 20, the outbreak of Covid-19 presented significant challenges for our business, impacting the full-year performance.”
He added: “We have taken decisive action through the second half of fiscal 2020, tightly managing our costs, reducing discretionary expenditure and reallocating resources across the group.”
The results mark Diageo’s worst annual sales performance in more than a decade, with its share price falling over 6% in early trading.
The company said it was still unable to provide a specific outlook for the year, after abandoning a full-year forecast in April. Its £4.5bn capital returns programme also remains suspended.
“The hit to earnings should be short-lived provided the global economy doesn’t take too long to recover,” said William Ryder, equity analyst at Hargreaves Lansdown. “We think the group will continue to do well long term, but management will have to focus more on debt reduction than they probably would have liked.”
