Guinness owner's profits fall due to duties and lower demand. Why is the stock rising?

The annual profit of Diageo, the world's largest alcohol producer, which produces Guinness and Johnnie Walker, fell by almost 30% amid inflation, falling demand and a management crisis. But despite this, the company's shares went up after the report was published. Investors were reassured by an encouraging outlook, cost-saving plans and organic sales growth that exceeded analysts' expectations.

Diageo shares soared 7% in early trading on the London Stock Exchange on Aug. 5 when the company published its annual report. In the hours that followed, they slowed to a 1% gain. The securities have lost 30% of their value since the beginning of the year. 

For fiscal 2025, which ended June 30, operating profit at the maker of Guinness and Johnnie Walker fell 27.8% to $4.3 billion. Analysts had forecast operating profit of $5.65 billion, wrote CityAM. However, investors were reassured by the company's announcement that it expects zero revenue growth for fiscal 2026 despite a $200 million loss due to trade duties, writes Reuters. 

Diageo's revenue decreased by 0.1% to $20.2 billion, while analysts quoted by CityAM predicted its growth of 1.4%.

In other metrics, the report came in above market expectations, with the company's fiscal 2025 organic sales up 1.7%, beating analysts' average forecast of 1.4% (according to an internal company survey), Reuters writes. 

Diageo expects organic sales to decline slightly in the first half of fiscal 2026, which ends in June 2026, with most of the growth coming in the second half of next year. The company increased its cost savings target to $625 million, $125 million more than previously planned. 

"While macroeconomic uncertainty and related consumer pressures continue to impact the spirits market, we continue to believe in the attractive long-term outlook for the industry and our ability to maintain outperformance as the TBA (total beverage alcohol) segment transforms. We are focused on what we can control and are acting with the utmost speed. The board and management are committed to delivering stronger financial results and sustainable growth in shareholder returns," said Acting CEO Nick Gianghiani (quoted by Yahoo). 

Alcohol producers in general are struggling amid a prolonged sales slump in the industry, with high interest rates and inflation reducing consumers' purchasing power, Reuters writes.

The maker of Johnnie Walker whisky and Smirnoff vodka is also facing investor worries about management instability. After Debra Crew unexpectedly stepped down as CEO last month, the company is looking for a new executive who can improve performance and implement a plan announced in May to cut costs and sell assets on a large scale by 2028.

Acting CEO Nick Gianghiani told reporters during a conference call that the board is working on it actively and a decision on the new head of the company is expected by the end of October, the agency writes.

Additional pressure comes from changes in consumer behavior - from a shift to healthier lifestyles to a growing interest in alternatives to alcohol, such as cannabis-infused drinks - as well as uncertainty surrounding trade relations with the U.S., Diageo's largest market. Under the terms of trade deals with Washington, Diageo's imports to the U.S. from the U.K. will be subject to a 10 percent duty and 15 percent from the EU, although the company still hopes to secure exemptions during negotiations, Reuters notes.

Diageo had hoped to offset the downturn in the spirits segment with the growing popularity of Guinness, which has seen a significant increase in demand in recent years thanks to Generation Z's interest and social media buzz, writes CityAM. Earlier there was speculation that the company could spin off Guinness into a separate business as part of a major cost-cutting program, but so far there has been no confirmation of that decision, the publication notes.

Analysts said the company's results and its outlook for the current fiscal year look encouraging given the challenging market conditions and are in line with expectations, Reuters wrote.

"These results may not be impressive, but they meet a key criterion for consumer companies - they are predictable," said RBC Capital Markets analyst James Edwards-Jones in a note. RBC gave Diageo a neutral rating, which corresponds to a "hold" recommendation. 

Robinhood UK lead analyst Dan Lane noted that Diageo's profits and margins have come under severe pressure even as Guinness peaks in popularity, which is justifiably worrisome, writes Yahoo Finance.

"The optimistic scenario around Diageo was that young people were drinking less but choosing higher quality drinks. However, high inflation has meant that consumers can no longer reach the 'top shelf' and seem to be both reducing consumption and switching to cheaper," said Lane.

After the publication of the report, UBS analysts gave the securities a "Buy" rating. The bank's analyst Sanjit Aujla noted that the company showed improved transparency of results amid weak growth. In addition, revenue and earnings forecasts for FY 2025/26 have beaten expectations. Also, he said, the scale of cost reduction and margin improvement targets were above forecasts.

Of the 23 analysts covering Diageo stock, 13 advise buying (Buy and Overweight ratings), seven advise holding (Hold) and three advise selling (Sell). 

This article was AI-translated and verified by a human editor