Diageo (NYSE:DEO) reported a weaker first half of fiscal 2026 as softer demand in U.S. spirits and continued declines in Chinese white spirits outweighed growth in several other regions, prompting management to cut its full-year organic net sales outlook and update its dividend policy.
First-half results pressured by U.S. tequila and China headwinds
Nik, presenting half-year results, said both organic net sales and organic operating profit declined 2.8% amid a “continued challenging macro environment and industry backdrop,” particularly in U.S. spirits and Chinese white spirits. He added that excluding Chinese white spirits, Diageo would have reported organic net sales down about 0.5% and roughly 1.5% growth in organic operating profit.
Diageo’s EPS pre-exceptionals declined 2.5% to $0.953, which management said was largely due to lower organic operating profit and the lapping impact of disposals, partly offset by a lower tax charge and reduced minority interests.
Regional performance: Strength outside North America, but not enough
Management pointed to strong growth in Europe, Latin America and the Caribbean (LAC), and Africa, but said this was more than offset by declines in North America and Asia Pacific (APAC).
- North America: Organic sales declined about 7%, driven by softness in U.S. spirits. Tequila sales fell approximately 23%, led by Casamigos and Don Julio, with management citing category downtrading and a more competitive tequila environment. Growth in Diageo Beer Company (about 7%) and Canada (just over 2%) only partly offset the decline.
- Europe: Management highlighted volume and value growth in Turkey, including double-digit growth for Johnnie Walker as distribution and visibility increased. Momentum in MENA continued, and Guinness grew across almost all markets, particularly Great Britain and Ireland. Diageo said it is improving commercial execution by bringing decision-making closer to customers and consumers.
- APAC: Organic sales fell around 11%, primarily due to continued declines in Chinese white spirits tied to market policy. Excluding Chinese white spirits, APAC net sales would have been slightly positive. India delivered strong results, with management citing momentum in prestige-and-above brands and innovation on Smirnoff and Royal Challenge.
- LAC: Net sales grew in most markets, including Brazil and Mexico. Management noted counterfeit alcohol incidents in Brazil during the second quarter, particularly in the on-trade, but said consumer confidence has gradually recovered more recently.
- Africa: Broad-based net sales growth was led by double-digit growth in South Africa driven by RTDs and strong beer performance in Tanzania.
Across measured markets, Diageo said it grew or held total market share in about 30% of markets by contribution to net sales, but called the result “clearly disappointing,” largely due to the U.S., which saw a 9 basis point TBA share loss. Management noted the U.S. represents about 35% of total net sales value in measured markets.
U.S. spirits: Tequila litigation and consumer pressure weigh on performance
In North America, management said pressure on consumer wallets and intensifying competition—especially in tequila—had a “marked adverse impact” on U.S. spirits. The organic sales decline was described as being driven “almost entirely” by Don Julio, Casamigos, and Crown Royal.
Management also said results were exacerbated by ongoing tequila litigation and separate media attention around additives and adulteration, which it said negatively impacted consumer sentiment. Diageo said it views the litigation claims as “baseless,” is pushing for dismissal in New York, and is working with industry influencers while emphasizing confidence that its tequilas are crafted from 100% blue agave.
Offsets in the U.S. included growth in Johnnie Walker driven by Johnnie Walker Blue, encouraging performance in smaller brands such as Ketel One and Astral, positive growth in RTDs and Guinness, and RTD share gains led by Casamigos Margaritas and innovations including Smirnoff Sunny Daze and Smirnoff Shorties. Guinness gained share every week of the first half, according to management.
Cost savings progress, but gross profit headwinds persist
Diageo said it made progress on its Accelerate program, with about 50% of the total $625 million of savings now expected to be delivered in fiscal 2026, and around 40% of total estimated savings realized in the first half. Most savings in the half came from supply agility and cost efficiencies, as well as advertising and promotion (A&P), with smaller overhead savings tied to corporate cost control and some headcount reductions.
Gross profit declined $324 million organically, driven by top-line performance, adverse product mix, cost inflation, and tariffs. Management said efficiencies across manufacturing, logistics, and supply networks partly mitigated the impact, with gross margin “broadly flat.” Lower marketing spend provided a $178 million benefit to operating profit, and overhead savings were linked to lower indirect costs, including optimized IT costs.
A&P spend was down about 10% year over year. Management said the company remains committed to investing in brands but is seeking greater effectiveness and efficiency, including pivoting investment toward Guinness in Europe and reallocating spending from spirits to RTDs in Brazil. Savings were attributed to lower development costs, procurement improvements, concentrating development on fewer larger opportunities, and smarter media buying.
Cash flow, balance sheet, dividend policy, and updated guidance
Free cash flow for the half was just over $1.5 billion, down $164 million from the prior year due to adverse working capital movements, which management said reflected the absence of a very favorable prior-year movement in creditor balances and a lower creditor balance at the end of the half. CapEx was about $590 million, down roughly $40 million year over year, with full-year CapEx guidance unchanged at the low end of the $1.2 billion to $1.3 billion range.
Diageo ended the half with net debt of $21.7 billion, slightly lower than at the end of fiscal 2025, while the leverage ratio remained flat due to lower EBITDA year over year. Management reiterated that completion of the sale of its 65% shareholding in EABL, announced in December, is expected to reduce leverage by about 0.25 turns, and said progress is being made through a strategic review by USL of its ownership in Royal Challengers Bengaluru.
The company declared a $0.20 per share dividend and announced a move to a 30% to 50% dividend payout policy. CEO Dave said the decision was intended to provide flexibility to invest in the business—highlighting needs in North America, portfolio competitiveness, and Guinness capacity and capability investment—while also strengthening the balance sheet. He said Diageo would make disposals if appropriate but “will not sell brands cheaply.”
On outlook, Diageo updated guidance due to “further weakness in the U.S.” and now expects organic net sales growth of down 2% to 3%, compared with prior guidance of flat to slightly down. Organic operating profit is now expected to be flat to up low single digits, down from prior expectations of low- to mid-single-digit growth. The guidance includes an assumption of tariffs at a 10% rate on UK imports and 15% on European imports, and assumes the USMCA exemption remains. Management noted increased uncertainty following a U.S. Supreme Court ruling related to tariff policy, but said it had not updated guidance for that risk. The company reiterated $3 billion free cash flow guidance for fiscal 2026, after exceptional costs related to Accelerate, while noting an expected one-off working capital impact of about $100 million tied to inventory build ahead of an S/4HANA implementation in early fiscal 2027.
About Diageo (NYSE:DEO)
Diageo plc is a global producer, marketer and distributor of alcoholic beverages, headquartered in London, England. The company was created through the 1997 merger of Guinness plc and Grand Metropolitan plc and is publicly traded on multiple exchanges, including the New York Stock Exchange (NYSE: DEO) and the London Stock Exchange. Diageo operates a worldwide business, selling products in a broad range of markets across the Americas, Europe, Africa, Asia and Latin America.
Diageo’s core activities cover the production, marketing and sale of a diverse portfolio of spirits, beer and liqueurs.
