Diageo's new finance head, Nik Jhangiani, is facing some heat to reconsider the company's medium-term sales targets next week.

Some investors believe these goals might not be achievable anymore due to declining sales in the industry.

The leading spirits company is set to release its interim results on February 4, which will be Jhangiani's first report since stepping into the role in September.

He'll need to either stick with the sales targets established in 2021 or acknowledge that the goal of 5% to 7% annual sales growth might not be realistic anymore.

"We believe that 7% is hardly achievable in the medium to long-term," said Kai Lehmann, a senior analyst at Flossbach von Storch, a top 20 investor in Diageo according to LSEG data.

New CEO Debra Crew stepped in back in June 2023, just before a stock pile-up in Latin America led to a profit warning that shook confidence in Diageo's leadership.

Since then, sales have been on a downward trend across the industry, as rising inflation and interest rates push consumers to tighten their wallets.

In July, Crew mentioned that it’s tough to predict when these challenges will ease and when the company might see sales growth of 5% to 7% again. Last year, their organic sales dipped by 0.6%.

Lehmann shared with Reuters that he’s brought this up with Crew and plans to discuss it again with finance chief Jhangiani.

However, he believes the target doesn’t necessarily need to change if the company feels it’s still attainable.

Lowering the target set by former CEO Ivan Menezes could put more pressure on the stock, which has already dropped 20% since the profit warning.

It would also imply that even if the economic situation improves, the sector might not be able to aim as high as it used to.

Diageo chose not to comment during the quiet period leading up to their results.

TIME FOR A RESET?

When Diageo set its growth target, the drinks industry was enjoying a COVID-19 boom as consumers were stuck at home treating themselves to pricey bottles of liquor. Diageo's organic net sales grew 16% in 2021, versus between 2.8% and 6.1% from 2016 to 2019.

Four investors, including Lehmann and two others among the top 40 shareholders, said they now doubt at least the upper end of Diageo's goal is realistic given current trends.

One of the top 40 investors, who asked not to be named in order to speak freely, thought Diageo should lower the target growth rate just slightly, to 4%-6%.

Even then, Diageo risks being out of step with peers like Pernod Ricard, still aiming for up to 7% growth, and Remy Cointreau expecting "high single digit" annual sales growth from 2025-26 despite analyst scepticism.

Crew defended Diageo's ambitions in July last year, saying the company believed in its long-term growth drivers including population increase, rising incomes in emerging markets and a so-far successful strategy to push drinkers towards increasingly pricey products. A cut could indicate one of those drivers is not as robust as hoped.

For some, short-term pain in terms of a knock to the share price would be preferable to overly ambitious goals.

"We would always rather have companies set expectations conservatively and then exceed them," the investor said.

Analysts at Barclays, Jefferies and RBC Capital Markets all said in recent notes they expect Diageo to lower its medium-term guidance next week.

BANKING ON PUSH TO PREMIUM

The industry is not just dealing with short-term economic issues; some analysts and investors believe there are longer-term risks too, like consumers drinking less, partly due to the rise in popularity of weight-loss drugs. Over the last three years, the price-earnings ratios for Diageo, Pernod Ricard, and Remy Cointreau have dropped quite a bit, which is a key indicator of how the market values these stocks. Additionally, U.S. tariffs that were threatened by President Trump could disrupt sales, especially for products like tequila.

Diageo has had its own set of hurdles, including a profit warning that raised concerns. One major investor, Fundsmith, decided to completely pull out, pointing to management issues and early signs that weight-loss drugs were impacting sales. Recently, the company denied rumors about selling its popular beer brand, Guinness.

Joseph Gabelli, a portfolio manager at Gabelli Funds, who holds a smaller stake in Diageo, believes that the company's challenges are more about temporary economic shifts rather than deep-rooted societal changes. He and others think Diageo is still in a good position for growth. The big question for Gabelli is whether Diageo can continue to encourage customers to choose more premium drinks at the same pace as before.

Currently, the premium segment makes up over 70% of sales in developed markets, and Kunal Kothari, a UK equity manager at Aviva Investors, suggests that it’s reasonable to expect a slowdown in its growth contribution. Kothari also pointed out that Diageo is more cyclical than many realize, which is something to consider when setting long-term growth goals.