DEO FY26 Preliminary Earnings Show Pressure on North America Weakness

The negative price/mix was primarily driven by adverse mix, reflecting weaker performance in US Spirits and softer results elsewhere.

The company delivered a free cash flow of $3.2 billion, up $463 million year over year, supported by disciplined investment and lower capital expenditure. Organic operating profit increased 2%, helped by cost savings from the Accelerate program.

Shares of the Zacks Rank #4 (Sell) company have lost 15.2% in the past year against the industry’s 12.6% growth.

Image Source: Zacks Investment Research

DEO Faces North America Category Pressure

North America remained the biggest challenge for Diageo, with organic net sales declining 8.4% year over year. The decline was driven primarily by US Spirits weakness, particularly in tequila, wherein net sales fell 21.1% due to category softness, increased competition and tougher comparisons.

Within US Spirits, Don Julio net sales declined 19.2% year over year, while Casamigos net sales dropped 27.7%. The company noted that Casamigos price repositioning and a refreshed marketing campaign are being rolled out to improve competitiveness. Meanwhile, Diageo Beer Company USA posted growth, supported by Guinness and Smirnoff RTD performance.

Diageo Delivers Growth Across Key Regions

DEO recorded stronger momentum outside North America, with Europe, Latin America and Africa contributing growth. Europe organic net sales increased 3.4%, supported by Guinness momentum in Great Britain and Ireland, along with strong performance in Türkiye.

Latin America and Caribbean organic net sales grew 7.7%, driven by Brazil and Colombia, while Africa delivered 13.3% organic net sales growth. In the Asia Pacific, organic net sales declined 6.3% due to weakness in Chinese white spirits, which offset strong growth in India.

DEO Expands Margins Through Cost Savings

Diageo’s organic operating profit increased 2% year over year despite lower sales, as cost savings helped offset pressure from adverse mix, inflation and tariffs. The organic operating margin expanded 116 basis points, reflecting benefits from the Accelerate program.

The Accelerate initiative delivered $540 million in savings in fiscal 2026. These savings came from more efficient advertising and promotion spending, supply-chain improvements and lower overhead costs. Advertising and trade investment savings contributed $230 million, supply-chain initiatives added $180 million and overhead actions delivered $130 million.

Diageo Strengthens Cash Position

DEO generated $4.4 billion in net cash from operating activities and $3.2 billion in free cash flow during fiscal 2026. Capital expenditure was $1.2 billion, reflecting a disciplined approach to investment compared with the prior year.

The company ended the year with net debt of $20.5 billion, down $1.4 billion from the prior year. Its leverage ratio improved to 3.1X from 3.4X, supported by strong cash generation. Diageo also recommended a full-year dividend of 50 cents per share under its revised dividend payout policy.

DEO Advances Restructuring Program

Diageo recorded significant exceptional charges in fiscal 2026, including $1.5 billion in impairment charges and $0.9 billion in restructuring costs. The impairment charges were largely related to Türkiye, the Don Papa brand and other smaller brands.

The company is implementing a two-year restructuring program focused on a new operating framework. Diageo expects the revised framework to generate $850 million in savings over two years, beginning in fiscal 2027, allowing investment in competitiveness while supporting operating profit.

Looking ahead, Diageo highlighted the need to improve competitiveness in North America while continuing to build on momentum in Europe, Latin America and Africa. Management expects the operating framework changes and cost savings to support future investment priorities.

Diageo Provides FY27 Outlook

DEO expects fiscal 2027 organic net sales growth to be broadly flat, with North America organic net sales projected to decline in the mid-single-digit range. The company assumes the North American market will decline 3% while improving its share performance from that in fiscal 2026.

The company expects fiscal 2027 organic operating profit growth in the low- to mid-single-digit range, supported by savings from its operating framework changes and supply-chain initiatives. Diageo expects to realize 40% of the $850-million operating framework savings in fiscal 2027, along with approximately 25% of the $150-million supply-chain savings.

For fiscal 2027, DEO forecasts a free cash flow of $2 billion after around $800 million of exceptional cash costs related to operating framework changes and $50 million of exceptional cash costs tied to the supply-chain savings program. The company expects to end fiscal 2027 near the midpoint of its target leverage of 2.5X-3X net debt to EBITDA, assuming completion of the East African Breweries PLC and Royal Challengers Bengaluru transactions.

Over the medium term, Diageo expects low-single-digit organic net sales growth from fiscal 2027 through fiscal 2029, with growth accelerating as North America stabilizes and gains share. The company projects mid-single-digit organic operating profit growth over the period, supported by savings and a more favorable mix, while expecting a free cash flow of $8 billion after around $850 million of exceptional cash costs.

Stocks to Consider

The Vita Coco Company Inc. COCO is the leading coconut water brand in the United States, leveraging its strong brand equity, expanding global presence and asset-light business model to capitalize on the growing demand for healthier hydration beverages. COCO currently sports a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The consensus estimate for Vita Coco’s current fiscal-year sales and earnings implies growth of 31.6% and 64.7%, respectively, from the year-ago reported figures. COCO has delivered a trailing four-quarter earnings surprise of 21.9%, on average.

The Coca-Cola Company KO is a leading beverage company with a portfolio of 32 billion-dollar brands spanning sparkling beverages, water, sports drinks, dairy and value-added beverages. KO currently carries a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for Coca-Cola’s current fiscal-year sales and earnings implies growth of 3.6% and 9.7%, respectively, from the year-ago reported figures. Coca-Cola delivered a trailing four-quarter earnings surprise of 4.6%, on average.

Primo Brands Corporation PRMB is a leading North American branded beverage company focused on healthy hydration. It currently has a Zacks Rank #2. 

The Zacks Consensus Estimate for Primo Brands’ current fiscal-year sales indicates growth of 1.6% from the prior year’s reported level. PRMB delivered a trailing four-quarter earnings surprise of 7.7%, on average.

Zacks' Research Chief Names "Stock Most Likely to Double"

Our team of experts has just released the 5 stocks with the greatest probability of gaining +100% or more in the coming months. Of those 5, Director of Research Sheraz Mian highlights the one stock set to climb highest.

This top pick is a little-known satellite-based communications firm. Space is projected to become a trillion dollar industry, and this company's customer base is growing fast. Analysts have forecasted a major revenue breakout in 2025. Of course, all our elite picks aren't winners but this one could far surpass earlier Zacks' Stocks Set to Double like Hims & Hers Health, which shot up +209%.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research