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Diageo plc DEO reported net sales data for third-quarter fiscal 2025 and issued other updates. On a reported basis, net sales of $4.4 billion jumped 2.9% year over year, due to organic growth, partly offset by foreign exchange headwinds and disposals. The Zacks Consensus Estimate is currently pegged at $4.1 billion.
Organic net sales climbed 5.9% year over year, with robust organic volumes increasing 2.8% and favorable price/mix of 3.1%. Significant phasing gains are likely to have contributed almost 4% to organic net sales growth. Organic net sales jumped 6% in North America, 2% in Asia Pacific, 29% in Latin America and the Caribbean and 10% in Africa, while the metric remained broadly flat in Europe.
All regions saw positive price/mix except Asia Pacific, where persistent consumer downtrading and negative market mix hurt sales. Management expects the majority of this phasing benefit to unwind in the fourth quarter.
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This Zacks Rank #3 (Hold) company’s shares have gained 4.9% in the past three months compared with the industry’s 17.6% growth.
Tariff & Other Updates for DEO
Assuming the present 10% tariff on both U.K. and European imports into the US, Mexican and Canadian spirits imports into the US are exempt under USMCA, with no other changes to tariffs. The unmitigated effect of such tariffs is estimated to be C$150 million annually.
Tariffs between the US and China do not hurt the company’s business materially. Considering the actions, before any pricing, management looks to mitigate almost half of this effect on operating profit on an ongoing basis. Moving forward, management looks to continue taking measures to neutralize this impact further. The anticipated impact in fiscal 2025 and fiscal 2026 is included in the company’s guidance.
In addition, Diageo has introduced the first phase of its Accelerate program, which defines clear cash delivery goals as well as a controlled approach to operational excellence and cost efficiency. This program focuses on how the company does business, shifting to a more agile global operating model and robust digital and data capabilities. This simplified approach looks to develop a solid platform to optimize investment and allocate resources toward long-term growth.
It forecasts to sustainably deliver C$3 billion free cash flow per year from fiscal 2026, which will be higher as performance improves. This is buoyed by C$500 million cost savings over the three years, hence enabling reinvestment in future growth and higher operating leverage. The company expects to return to its target leverage ratio range of 2.5-3x net debt/EBITDA no later than fiscal 2028, hence offering higher flexibility.
Solid organic growth and leveraged operating costs, coupled with robust capital discipline and appropriate disposals in the coming years, will help DEO in achieving such targets.