Diageo Shares Surge Up to 8% as New CEO Dave Lewis Unveils $850m Cost Savings Plan
Key Takeaways
- •Diageo pledged up to $850 million in cost savings under new CEO Dave Lewis as part of a turnaround strategy.
- •The company's annual sales fell three percent to $19.6 billion, while profit dropped by more than a fifth to just under $2 billion.
- •Lewis signaled a shift away from the prior premiumisation strategy toward activating a wider product portfolio to serve more consumers across different price points.
- •Diageo reduced its dividend from 63 to 30 cents per share and recorded a $1.5 billion impairment charge primarily related to its Turkish operations.
- •Regional results were mixed, with growth in Europe and Latin America offset by declines of 8.3 percent in Asia and 9.1 percent in North America.
Diageo shares jumped as much as eight per cent on Thursday after the London-listed drinks giant pledged to deliver up to $850m (£631m) in cost savings under new chief executive Dave Lewis, who vowed to reverse the company's declining fortunes.
The FTSE 100 group, whose portfolio includes Guinness, Johnnie Walker and Tanqueray, reported a three per cent decline in sales to $19.6bn for the year ending June, while profit fell by more than a fifth to just under $2bn.
However, the company indicated it expects to halt the sales decline in the coming year, with the planned savings driving improved profitability.
Lewis, who earned the nickname 'Drastic Dave' for his aggressive turnaround work at previous companies including Tesco, where he led a recovery after an accounting scandal, took the helm at Diageo at the start of the year. He promised to build "a more agile and competitive operating framework" centred on "customer, customer, customer."
The new chief executive appeared to moderate the 'premiumisation' strategy pursued by his predecessor, a shift prompted by consumers trading down from expensive spirits to more affordable alternatives — a trend that has dealt Diageo a significant financial blow and has also weighed on competitors across the global spirits industry as inflation squeezes household budgets.
"We remain a business with a very strong premiumisation agenda, but by activating our wider portfolio, we will be able to serve more consumers, across a variety of occasions," Lewis said.
Regional performance was mixed. Diageo posted sales growth of 5.7 per cent in Europe and 16.9 per cent in Latin America, but these gains were offset by an 8.3 per cent decline in Asia and a 9.1 per cent drop in North America, historically the company's largest and most profitable market. The company also slashed its dividend from 63 to 30 cents per share and recorded a $1.5bn impairment charge, primarily linked to a writedown of its Turkish operations.
"There is hard work ahead, particularly in North America, where improving performance is a clear priority, but we are confident we can deliver without taking a step back in operating profit," Lewis said.
Chris Beauchamp, Chief Market Analyst at investing and trading platform IG, remarked that "desperate times call for desperate measures" and noted that Lewis was acting on his mandate.
"The slashing of the dividend is the kind of thing only incoming chief executives with a mandate to save the business are allowed to do without cratering the share price — the market was prepared for it anyway after the half year was given similar treatment to today's full-year figure," Beauchamp said.
"Now comes the hard part, convincing and then showing investors that the turnaround plan is going to pay off."
