FO Fortune Brands

Diageo Plc.’s (DEO) fiscal 2011 net income from continuing operations grew 16.1% to £2.02 billion ($3.3 billion) from £1.74 billion in the year-ago period. Earnings per share came in at 76 pence ($1.24 per ADR), compared to £0.65 per share in the year-ago quarter.

Net sales recorded growth of 1.6% year over year to £9.93 billion ($16.20 billion). Excluding the impact of foreign exchange, acquisitions and disposals, organic sales revealed a growth of 5%. Volumes also grew 3% year over year to 147.5 million of equivalent units.

In North America, Diageo’s net sales grew 3% flat year over year to £3.32 billion ($5.41 billion). Growth in North American segment was driven by growth of spirit and beer in the United States. The growth was backed by strong performance by brands like Ciroc, Crown Royal Black, Buchanan’s and the silver and super premium variants of Jose Cuervo. However, ready-to-drink net sales inched down by 3% on account of weak volume of Smirnoff Ice.

In Europe also net sales climbed up by 3% year over year to £2.61 billion ($4.26 billion) from £2.76 billion in the prior-year quarter. Diageo witnessed strong double digit growth in Russia, Eastern Europe and Germany. However, Great Britain, France, Benelux and Italywitnessed lackluster performance. In terms of key brands, Johnnie Walker volumes declined 5%, while J&B and Guinness fell 8% and 4%, respectively.

In the International segment, Diageo’s net sales rose by 13% year over year to £2.75 billion ($4.49 billion) primarily due to strong performance in Latin America and Global Travel and Middle East business. In terms of key brands, Johnnie Walker volumes jumped 20%. Smirnoff volumes posted a growth of 9% year over year, while Buchanan’s went down by 2%.

In the Asia-Pacific region, net sales grew by 9% year over year to £1.20 billion ($1.95 billion) almost entirely due to favorable currency movements. Diageo posted double-digit growth in South East Asia, driven by Windsor and Johnnie Walker brands. However, sales growth in the region was partially offset by declines in China.

Diageo’s gross profit during the quarter increased 4.3% year over year to £5.92 billion ($9.66 billion), while gross margin dipped marginally by 70 basis points (bps) driven by improved mix in emerging markets and North America, and efficiencies across our Global Supply operations

Total operating expenses rose 3.6% year over year primarily due to higher marketing spend to support key brands. Diageo’s operating income inched up by 0.1% growth to £2.59 billion ($4.22 billion) from £2.57 billion in the year-ago period.

At the end of fiscal 2010, Diageo had cash and cash equivalents of £1.58 billion ($2.57 billion) and borrowings of £1.45 billion ($2.36 billion).

The recent economic downturn has left Diageo shaken. Besides, the stiff competition from Pernod Ricard and Fortune Brands Inc. (FO) in the spirits business and Anheuser-Busch InBev (BUD) and Molson Coors Brewing Company’s (TAP) beer business undermines Diageo’s value in the eyes of the investors.

Diageo holds a Zacks #3 Rank, which translates into a short-term Hold rating.

 
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