Diageo shares drop after quarterly sales decline

By Martinne Geller

LONDON (Reuters) - Diageo Plc (DGE.L), the world's largest spirits maker, reported a drop in quarterly sales on Thursday despite an improvement North America, hurt by challenges in several emerging markets.

The maker of Johnnie Walker whisky, Smirnoff vodka and Guinness beer said net sales in the three months to March 31, the third quarter of its financial year, fell 0.7 percent, whereas many analysts had expected an increase.

The company, whose global rivals include Pernod Ricard (PERP.PA), Remy Cointreau (RCOP.PA) and Beam Suntory [BSI.UL], blamed the timing of shipments in Latin America, currency devaluations, plus the impact of retailers and distributors reducing inventories to more closely reflect expected demand.

It was the seventh straight quarter of nearly flat sales, said analysts at brokerage Jefferies, who reiterated their "buy" rating on the stock due to relative valuation and performance.

"Diageo remains as unloved as we can remember," Jefferies said. Reuters data shows the stock trades on 19.8 times forecast earnings against a sector average of 21.6.

"We remain believers in a recovery," Jefferies added. "But recovery is clearly going to take a while."

Diageo shares, which spiked on Wednesday to their highest in nearly three months, fell more than 2 percent.

Yet in North America, Diageo's biggest profit earner, sales rose 0.9 percent, an improvement from the decline of 0.1 percent the region saw in the last half of 2014. Diageo executives said earlier this year they hoped to see increased U.S. demand as lower gasoline prices meant more spending money for consumers.

Compared with the previous six months, sales trends also improved in Africa, but worsened in Europe, Asia Pacific, Latin America and the Caribbean.

"Our performance in the quarter reflects continued tough conditions in the emerging markets and subdued consumer demand in some developed markets," Chief Executive Officer Ivan Menezes said in a statement.

The company also blamed British sales that fell by a high single-digit percentage due to a tough comparison with last year, when sales were boosted as customers stepped up purchases ahead of an expected increase in alcohol duties.

The quarterly report is the last of its kind for Diageo, which will conduct only half-year reporting from its next financial year.

Remy Cointreau on Wednesday posted a 38.7 percent jump in fourth-quarter cognac sales, helped by demand in the United States and China's lunar new year celebrations.

Diageo shares were down 2.3 percent at 1,921 pence by 1111 GMT.

(Editing by David Goodman and David Holmes)