Diageo 1H'26 Earnings & Sales Decline Y/Y, Organic Sales Drop 2.8%

Diageo plc DEO reported interim results for the first half of fiscal 2026, which ended Dec. 31, 2025, wherein pre-exceptional earnings per share declined 2.5% year over year to 95.3 cents. This was mainly due to reduced organic operating profit and lapping the profit effect of disposed businesses, somewhat offset by a soft tax charge and decline in profit attributable to non-controlling interests.

On a reported basis, net sales of $10.5 billion declined 4% year over year due to soft organic net sales and the negative effects of disposals.

Organic net sales dipped 2.8% year over year, thanks to an organic volume drop of 0.9% and a negative price/mix of 1.9%. Robust organic net sales growth in Europe, Latin America and Caribbean (LAC) and Africa was more than offset by weak performance in North America due to pressures on disposable income hurting U.S. Spirits and the unfavorable impacts of Chinese white spirits in the Asia Pacific.

Shares of the Zacks Rank #4 (Sell) company have lost 23.1% in the past six months against the industry’s 9.2% growth.

Diageo’s 1H’26 Highlights

We note that trading conditions remained tough in the first half of the year, mainly owing to macroeconomic and geopolitical uncertainty, and weak consumer confidence across the key markets. Spirits increased mid-single-digit in LAC and Africa, and remained flat in Europe; this was more than offset by softness in North America and Asia Pacific. In RTDs, organic sales grew double-digit on strength in Smirnoff Ice. In beer, despite the broader category pressure, DEO delivered high-single-digit growth, underpinned by solid Guinness growth.

Diageo continues to aid growth across its portfolio by increasing brand and pack offerings at higher accessible price points and recruiting legal purchasing age (LPA) consumers across all age groups. Scotch returned to growth, generating volume and value growth, backed by Johnnie Walker, Buchanan's and Black & White. Johnnie Walker Red, Johnnie Walker Black and Johnnie Walker Blue all registered organic volume and sales growth. Johnnie Walker's growth surpassed the category through successful advertising, innovation, higher point of sale activation and targeted competitive price adjustments. Türkiye, MENA, U.S. Spirits and Brazil were the standout markets.

Diageo plc Price, Consensus and EPS Surprise

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In tequila, weakness in North America, the company’s largest region for tequila, more than offset mid-single-digit growth in all the other regions. Don Julio and Casamigos both fell double-digit, reflecting weakness in the top-end of the category in the US as consumers downtraded. This more than offset the double-digit increase in Astral, priced at a more accessible price point but from a meaningfully lower base.

In MENA, a new market established in 2024, DEO delivered organic net sales growth of 24.6%, backed by effectively scaling its luxury business, particularly with Johnnie Walker. In India, extension of formats with 180ml McDowell's and Royal Challenge, and new flavor innovations in Smirnoff, recruited new LPA consumers at scale. The company continues viewing ready-to-drink (RTD) as key to recruitment, catering to consumer demand for both convenience at an accessible price point and moderation. In the first half, DEO’s spirits RTD portfolio grew net sales 17% organically. Smirnoff RTDs expanded its share in four out of five regions, including North America.

In beer, Guinness saw organic net sales growth of 10.9%, with strength in all regions except Asia Pacific, hurt by the changes in route-to-market in China and Australia. The new Littleconnell brewery will contribute to aid further geographic expansion, boost capacity for existing markets and drive Guinness 0.0 expansion. Innovation aided growth, with Crown Royal in the US being the largest contributor due to Crown Royal Blackberry and Crown Royal Chocolate. Johnnie Walker Black Ruby was an outstanding performer, expanding into Asia Pacific and LAC, and with healthy performance in Global Travel, Türkiye, Japan and Korea.

The reported operating profit dipped 1.2% year over year, owing to lower organic operating profit and exceptional operating charges. The reported operating margin expanded 85 bps on the positive impacts of disposals. Organic operating profit fell 2.8% year over year, with the organic operating margin being flat, mainly owing to the adverse market mix and tariff costs offset by reduced marketing investments.

DEO’s Financials

At the end of the first half of fiscal 2026, Diageo delivered net cash flow from operating activities of $2.1 billion. DEO reported a free cash flow of $1.5 billion. Net debt as of Dec. 31, 2025, was $21.7 billion.

On Dec. 17, 2025, the company announced an agreement to divest its 65% shareholding in East African Breweries plc and its shareholding in its Kenyan spirits business to Asahi Group Holdings, Ltd. The expected net proceeds after tax and transaction costs of $2.3 billion imply a 17x EBITDA multiple. This is likely to conclude in the second half of 2026.

The company has announced an interim dividend of 20 cents. It is committed to increasing shareholder distributions over time, targeting a 30-50% payout policy moving forward, with a minimum floor set for the dividend of 50 cents per annum.

DEO’s cost savings program is progressing well, with expected accelerated savings in fiscal 26. Supply-chain agility and related cost savings, A&P efficiencies and overhead savings have been tailwinds.

For fiscal 2026, the company expects capital expenditure to be at the low end of the $1.2-$1.3 billion range.

Diageo’s FY26 Outlook

Diageo expects an organic net sales decline of 2-3% on further weakness in the US, including the effect of Chinese white spirits. It anticipates organic operating profit remain flat to increase low-single-digit, reflecting the updated net sales guidance and the tariff impacts. This includes savings from the Accelerate program.

Management has reiterated free cash flow guidance at $3 billion for fiscal 2026. This includes exceptional cash costs associated with the Accelerate program.

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