Diageo (DEO) Hurt by Coronavirus Impact, Withdraws FY20 View

As the novel coronavirus outbreak shows no signs of stopping anytime soon, Diageo plc DEO announced global business updates and the impact of government restrictions on its operations. To this end, management has withdrawn its organic net sales and operating profit guidance for fiscal 2020.

Prior to this, Diageo had trimmed the net sales view for fiscal 2020 on the ongoing trade conflicts in key markets and the spread of coronavirus in China. The company expected the persistence of increased levels of volatility in India, Latin America and the Caribbean, and Travel Retail to hurt sales for fiscal 2020. It had earlier anticipated net sales growth for fiscal 2020 at the lower end of the 4-6% range. On Feb 26, the company envisioned the negative impact of the coronavirus outbreak on its fiscal 2020 organic net sales to be £225-£325 million and organic operating profit to be £140-£200 million.

Similarly, other major spirit retailers who withdrew 2020 guidance are AB InBev BUD, Molson Coors TAP and Heineken HEINY.

In the past three months, shares of this Zacks Rank #4 (Sell) company have lost 20.6% compared with the industry’s decline of 27.2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moving on, Diageo notes that the interim dividend of 27.41 cents per share, which was announced on Jan 30, has been paid out to shareholders on Apr 9 and the US ADR holders will receive it on Apr 14.

Aftermath of Coronavirus

Given the unprecedented impacts of COVID-19, Diageo has decided not to buyback any shares under its three-year share repurchase plan worth up to £4.5 billion, for the rest of fiscal 2020. Apart from these, the company is undertaking other preventive measures, such as lowering discretionary expenses, suspending A&P costs and capital expenditure, and tightening control on working capital.

Coming to closures, the company is grappling with weakening sales stemming from lockdown impositions in many countries to curb the spread of this virus. Notably, the company’s bars and restaurants in North America, which account for roughly 20% of U.S. Spirits’ net sales, are closed since March. Further, its stores have been closed in most parts of Europe, which forms 50% of net sales in the said region. However, both North America and Europe have recently witnessed a marginal uptick in the off-trade channel, but it is yet to be seen whether this can sustain.

Meanwhile in India, the on and off-trade channels as well as production facilities remain shut, given the nationwide lockdown until April 14. In Africa, the company’s on-trade channels have been affected as two production sites in Nigeria are closed. This move follows the lockdown in South Africa until Apr 16. On the flip side, its operations in Mainland China have started resuming with a slight increase in traffic.

Wrapping Up

That said, management is working round the clock to ensure minimum business disruption. In sync with its objective to safeguard employees and customers, the company remains poised on safety measures across all facilities, including aggressive sanitization, implementing work from home options, social distancing via closures and travel curbs. Also, it is extending support to suppliers and customers for quick recovery of demand.

In addition, the company is doing its bit in this battle against the ongoing pandemic. Diageo has donated alcohol, which will be utilized to make more than eight million bottles of sanitizer for usage by frontline health workers. Further, it is providing assistance to bartenders and others affected by store closures spurred by COVID-19.

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