Key Takeaways:
Diageo shares climbed as much as 7.8 percent Thursday after the spirits maker unveiled a $1 billion restructuring plan, offsetting a 27 percent drop in operating profit.
"This new strategy, executing with a new, more agile, competitive and cost-effective operating model, gives us confidence that we can return Diageo to a business consistently creating value for shareholders," CEO Dave Lewis said.
Operating profit fell 27.2 percent to $3.16 billion for fiscal 2026, driven by $1.5 billion in impairment charges linked to hyperinflation in Türkiye and the write-down of the Don Papa brand. Excluding exceptional items, organic operating profit rose 2 percent and organic operating margin improved 116 basis points. Net sales declined 3 percent to $19.64 billion, with organic net sales down 2 percent, in line with estimates. North America organic sales fell 8.4 percent, while growth across Europe, Africa, and Latin America and the Caribbean helped offset softer conditions.
The company cut its full-year dividend to 50 cents per share from 103.48 cents, reflecting a revised capital allocation policy. For fiscal 2027, Diageo expects broadly flat organic net sales and low- to mid-single-digit organic operating profit growth, with free cash flow of about $2 billion. The company targets cumulative free cash flow of $8 billion between fiscal 2027 and fiscal 2029.
The restructuring program aims to generate approximately $1 billion in cumulative savings over three years, with total implementation costs estimated at around $1.2 billion. Management expects the operating framework changes alone to deliver approximately $850 million in savings over two years, with about 40 percent expected during fiscal 2027 and the remainder in fiscal 2028.
Net profit fell 22.9 percent to $1.96 billion, while basic earnings per share declined 26.3 percent to 78.1 cents. Earnings per share before exceptional items edged up 0.7 percent to 165.3 cents. Free cash flow improved by $463 million to $3.2 billion, while net debt stood at $20.5 billion, equivalent to 3.1 times adjusted EBITDA.
Lewis, who joined Diageo in January after succeeding Debra Crew, said the company was "focused on recovering" North America and "working through the consequences of Government policy in Chinese white spirits." The revised operating framework "will allow us to invest in the turnaround without needing to reduce operating profit," he added.
Chris Beckett, consumer staples analyst at Quilter Cheviot, said Lewis seemed to be living up to his nickname "Drastic Dave" with deeper cuts that will last longer than many expected. "If it can hit its three-year targets, however, then the pain of this restructuring will be considered worth it and investors should see greater returns once again," he said.
The company forecast low-single-digit organic net sales growth through fiscal 2029, replacing its previous medium-term target of 5 percent to 7 percent growth that was scrapped in 2025 as demand across the industry slumped. The FIFA World Cup helped drive sales of ready-to-drink beverages and cocktails up 35.1 percent, led by Casamigos ready-to-serve cocktails and strong sales of Bulleit and Ketel One.
The dividend cut and restructuring show management's commitment to resetting the business after years of stagnant sales. Investors will watch the company's investor day for further details on the operating model redesign and supply chain improvements.
This article is for informational purposes only and does not constitute investment advice.
