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One of Lex’s top tips for rookie bosses: markets should not be encouraged to question your credibility early on. On Friday, Debra Crew, in charge only since June, had to admit that drinks group Diageo had an inventory problem in its fastest-growing region, Latin America and Caribbean (LAC). Worse, she was not quite sure why. Its share price sank quicker than a cocktail cherry, down 15 per cent.
Crew might well need a stiff drink for next week. Diageo’s chief executive will then debut her strategy to investors. She must explain why inventory levels in the LAC region are higher than expected ahead of the important holiday season. Net regional sales will now drop a fifth in the interim to December. No hint of problems came through in the August full-year statement.
It was not just analysts who were surprised. Crew could not explain why this build-up happened nor even add much detail as to where the hiccups occurred. More than half of its business comes in Brazil and Mexico. True, the LAC region has had a reputation for opacity on inventory data within distribution channels, unlike in North America. Yet Crew does have experience in the Americas with PepsiCo, so she is hardly an ingénue.
Expect discounting to follow. Thus, the mark down on sales. Operating profits have more than doubled there in the two years to June, expanding faster than sales.
Another negative: her medium-term — time period not given — group sales outlook held firm at 5 to 7 per cent. But a vague comment about profit trends gave little comfort and hinted at an erosion of profitability.
Diageo may have bottled it, but the shares are getting cheap. Assume analysts mark down this year’s net profit estimates by a tenth. That still puts Diageo on 18.5 times forward earnings, near a five-year low.
Crew’s presentation slides will receive extra scrutiny next week. Expectations will remain low at least until the next interim results.
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