Diageo's Tariff Uncertainty: A Blow to Midterm Guidance

Diageo, the world's largest spirits company and maker of Smirnoff, has scrapped its midterm guidance amid uncertainty surrounding potential US tariffs on Mexico and Canada. The company, which also owns brands like Johnnie Walker and Guinness, cited the uncertainty and potential impact of the tariffs as the reason for removing its guidance for organic net sales growth of 5-7% for the full year.

The decision to withdraw guidance comes as Diageo faces a challenging environment, with consumers navigating through inflationary pressures and the company's Latin American and Caribbean (LAC) region experiencing a double-digit drop in the previous six months. Despite these challenges, Diageo's organic net sales grew by 1% in the first half of its fiscal year, driven by growth in four of its five regions and market share gains in over 75% of total net sales value in measured markets.

The potential US tariffs on Mexico and Canada could have a significant gross impact on Diageo's operations, excluding any mitigations or pass-throughs. The tariffs could affect two of Diageo's key product categories: tequila and Canadian whisky. Tequila accounted for 11% of Diageo's group sales in the full year 2024, with the majority of those sales coming from the US. Similarly, Canadian whisky accounted for 6% of Diageo's group sales. Given the potential financial impact and the uncertainty surrounding the tariffs, Diageo decided to remove its midterm guidance to avoid overpromising and to provide more frequent updates to investors as the situation develops.

Diageo's CEO, Debra Crew, acknowledged the removal of guidance, stating that the company had anticipated and planned for a number of potential scenarios but that the prospect of the levies "adds further complexity in our ability to provide updated forward guidance given this is a new and dynamic situation." She also noted that the tariffs could impact the momentum the company had built during the first half of its financial year.

The decision to ditch its guidance comes as Diageo faces pressure from investors, with confidence in the company's management waning since CEO Debra Crew issued a shock profit warning in late 2023 following a sales slump in Latin America. The company's share price has fallen about a fifth in the past 12 months as investors have grown weary of the company's poor performance and the industry's long-term growth prospects have faced scepticism.

Diageo's decision to withdraw guidance highlights the broader market sentiment of uncertainty and volatility. The company's CFO, Nik Jhangiani, acknowledged that the situation regarding potential tariffs is "pretty fluid," and the impact could cost the business up to $200 million. This uncertainty, coupled with the slower-than-expected recovery in some markets, has led Diageo to adopt a more conservative approach to its financial outlook.

In contrast, some analysts still expect Diageo to outperform its competitors operationally, benefiting from its better brand, category, and country exposure. However, the company's decision to withdraw guidance suggests that it is being more cautious about the medium-term growth prospects, given the current market conditions and uncertainties.

In summary, Diageo's decision to withdraw its midterm guidance is a reflection of the company's specific challenges and the broader market sentiment of uncertainty and volatility. While some competitors have maintained their guidance, Diageo's action highlights the need for a more cautious approach to financial planning in the current environment. Investors should closely monitor the situation and be prepared for potential updates as the company navigates the uncertainty surrounding the US tariffs.