RBC (TSX:RY) Capital Markets in a note dated Monday has upgraded Diageo (LON:DGE) to a “sector perform” rating from “underperform” and raised the price target to £24 from £21.
This upgrade comes as Diageo prepares for leadership changes and aims to recalibrate expectations towards a more conventional consumer staples outlook.
With a new CFO, Nik Jhangiani, and a new Head of Investor Relations, Sonya Ghobrial, joining soon, Diageo is poised for a strategic reset.
“ Diageo has the opportunity to reset expectations based on a future as a conventional staples business,” analysts at RBC said.
“This should involve kitchen-sinking revenue and profit guidance, a pre-requisite of repairing investor confidence,” they added.
Diageo has faced difficulties with volume growth despite raising prices by approximately 30% per case since 2020, significantly outpacing inflation.
RBC Capital Markets notes that this pricing strategy has negatively impacted volume, leading to a decline in the proportion of sales from high-end Reserve Brands from 29% in 2023 to 27% in 2024.
The brokerage expects this trend may continue, affecting margins and growth.
The decline in high-end Reserve Brand sales could challenge Diageo's previous revenue growth and profitability targets.
RBC Capital Markets believes that Diageo could benefit from reducing its investment in maturing inventory and capital expenditure, which have been running above historical levels.
Over the past decade, Diageo has underperformed relative to the broader food and beverage sector.
RBC Capital Markets suggests that by abandoning outdated growth guidance and aligning expectations with current market realities, Diageo can work towards rebuilding investor confidence.
“Investor confidence has been severely dented in our view, and the key to rebuilding it is to under-promise and over-deliver,” analysts said.
The notion of Diageo as an "affordable luxury" brand is questioned by RBC Capital Markets. The brokerage argues that the combination of high price increases and deteriorating volume growth aligns more with traditional consumer staples challenges rather than luxury market dynamics.
The note suggests that Diageo's recent performance and strategic direction may reflect a shift away from its previous luxury positioning.