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Why Diageo Stock Dropped on Friday

Shares of Diageo (DEO -11.72%) fell 11.7% on Friday after the alcoholic beverage company warned of a sharp slowdown in growth for its business in Latin America.

More specifically, in a press release early Friday morning, the company said that it now expects to see slower growth in the first half of fiscal-year 2024 than in the second half of fiscal 2023. The culprit, it says, is primarily a “materially weaker performance outlook in the Latin America and Caribbean (LAC),” a region representing almost 11% of net sales volume last fiscal year.

In particular, organic net sales are now expected to decline by more than 20% year over year in the LAC region (the company’s fiscal year ends on June 30). 

On Diageo’s macro headwinds in Latin America

The update is in contrast to a statement management issued in late September, when it said that its outlook for fiscal-year 2024 had not changed since Aug. 1. At that time, Diageo had predicted “a gradual improvement in organic net sales from the second half of fiscal 23” for its consolidated businesses leading into the new fiscal year.

The reasons for its weakness in Latin America, it says, are macroeconomic pressures that are hurting consumption and “consumer downtrading” — when buyers switch from larger, more-expensive products to smaller, lower-priced alternatives or different brands.

The company also offered updates on its remaining geographic segments, including continued expectations for a gradual improvement in both North America and Africa, as well as “continued momentum, albeit slower than in the second half of fiscal 23” in the Europe and Asia-Pacific regions.

What’s next for Diageo investors?

The timing of the release is no coincidence because the company is set to host an event for investors on Nov. 15. Management pledged to share more details on the company’s medium-term guidance at that event, and you can be sure investors will be asking for it to elaborate on the LAC region expectations.

That’s not to say Diageo is a broken business. It still has an enviable portfolio of over 200 globally recognized brands, including Guinness beers, Baileys liqueurs, Crown Royal whisky, Smirnoff vodka, and Captain Morgan rum. But as a consumer goods stock that’s obviously sensitive to macroeconomic headwinds, it’s hardly surprising to see shares pulling back today.

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