Spirits giant Diageo eased back this week despite posting double-digit annual sales growth, as falling volumes and a sales slowdown in its key US market raised investor concern.

The FTSE 100 alcohol player posted net sales growth of 10.7% to £17.1bn in the year to 30 June, driven by solid organic net sales growth and favourable impacts from foreign exchange.

Organic net sales were up 6.5% thanks to price/mix gains of 7.3 percentage points, reflecting a high single-digit contribution from price and premiumisation. Premiumisation similarly helped organic operating profit grow 7% and organic operating margin expand by 15bps. This was also  driven by disciplined cost management, while price increases more than offset the absolute cost inflation impact on gross margin.

Reported operating profit grew a more modest 5.1% to £4.6bn, while reported operating margin declined by 147bps due to exceptional operating items and foreign exchange.

The sticking point was reported volume, which declined by 7.4% due to divestments, while organic volume declined by 0.8% as consumers reacted to price hikes. Much of that organic volume decline was driven by North America, where volumes dropped 5%. Europe, meanwhile, was flat and Asia Pacific was in growth of 5%.

Diageo noted its strong net sales growth in the first half moderated in the second half, but it expects an improvement in the first half of 2024.

It also expects organic operating margin to continue to benefit from premiumisation trends and operating leverage as it invests heavily in marketing. Organic operating profit growth is expected to gradually improve from the second half of 2023.

Jefferies noted the performance was “robust and no big surprises in outlook”, but predicted some share price weakness amid slightly slower growth than expected, financial items and adverse foreign exchange impacts.

Roberto Rivero, market analyst at Admirals, commented: “Diageo has successfully managed to offset much of the impact of cost inflation by raising prices, with net sales and operating profit both increasing year on year.

“Nevertheless, a slowdown in growth in the North American market, which accounts for roughly 40% of net sales, is likely to be of concern to shareholders. Moreover, despite alcohol’s consumer staple status, as growth slows to a crawl in developed countries, demand for Diageo’s products could take a hit”.

Bernstein called the results “mixed”, noting a major deceleration from the first half to the second half. However, it said the second half performance should represent the “likely nadir in terms of organic growth, with lots of reasons to believe we will see a steady acceleration through 2024”.

Diageo shares fell back 0.4% on Tuesday to 7,666.3p and another 2.3% back to 7,491.7p by Thursday lunchtime. The shares are down by almost 14% year on year.

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