FTSE hit by Diageo share slump as drinks giant sees problems grow and Greggs bucks negative retail trend with solid growth

“A catastrophic session from Diageo served to drag down the FTSE 100 index, which was also hit by Glencore’s weak production update,” says Russ Mould, investment director at AJ Bell.

“BP’s strategy of pre-releasing bad news seems to have worked as that lowered expectations in the run-up to its results. The shares bounced back after second quarter profit beat forecasts, helping to make up for weak refining margins. A $3.5 billion share buyback went down well and so did a 10% bump in the dividend, showing that the oil and gas producer is still a cash machine.”

Diageo

“Diageo has gone from bad to worse. It has reported an operating profit decline in four out of its five operating regions, two of them in substantial double-digit territory. The company can dress up the numbers all it wants, but it’s clear that something major has to change.

“Debra Crew will be fighting to keep her job as chief executive. If the board doesn’t do something, one can expect activist investors to circle Diageo and push for new leadership.

“This is a business with an enviable portfolio of brands and a distribution network that ensures its products have prominence in pubs, bars, hotels, restaurants and shops. The big question is how can a business of this calibre lose its way? Unfavourable foreign exchange movements are an unfortunate obstacle for any company, but there is more to Diageo’s problems than currency rates.

“Management seems to have taken its eyes off the ball with monitoring inventory levels and working out ways to keep consumers spending when they are being pickier with where they splash the cash.

“Diageo’s shares have tanked once again on the latest results. Investors won’t like the figures, nor will they like the absence of a new share buyback programme and the fact the balance sheet is close to getting out of the company’s comfort zone. Diageo targets 2.5 to 3 times net debt to adjusted earnings and the leverage ratio is now sitting at the top end.

“Following the latest sell-off, Diageo’s share price is now trading at a seven-year low. That’s the market’s way of saying it is thoroughly unimpressed with the business.”

Greggs

“Amid the likes of Carpetright shutting stores, Picturehouse closing cinemas and Ted Baker going into administration, it’s clear that the retail sector has been going through a very difficult patch this year.

“Poor weather, individuals tightening their belts, and inflation staying stickier than expected have all made life hard for businesses reliant on consumer spending. It is therefore reassuring that Greggs has been able to push through the difficult landscape and continue to grow earnings.

“Menu innovation is helping to keep hungry shoppers interested, the decision to open longer hours is paying off, and encouraging greater use of the Greggs app means it is learning more about customer preferences. The more it knows about its shoppers, the more it can tailor offers or create products which should appeal to its loyal fanbase and keep them engaged and potentially spend more frequently.

“While it may feel as if there is a Greggs store on every high street, the company continues to find new places to plant flags. This includes concessions inside supermarkets and hubs inside train stations, while also taking advantage of troubles in the retail sector to relocate stores when better-sized or better-positioned properties come on the market.”

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