JDE Peet’s Earnings: Europe Continues To Disappoint; Profit Guidance Downgraded

JDE Peet’s JDEP reported first-half fiscal 2023 results with 3.5% group organic growth, slightly below company-compiled consensus of 3.8%. Within this, organic growth in Europe, the group’s most profitable segment, was the negative surprise of 0.3% versus 2% for consensus, while Larmea and JDE Peet’s came in higher than expectations at 10% and 8.6% respectively, partially offsetting underperformance in Europe. Adjusted EBIT was down 7.9% (including foreign-exchange and scope-change effects) slightly better than the negative 9.3% anticipated by consensus. Management confirmed top-line guidance for fiscal 2023 with organic sales growth at the high end of its medium-term range of 3%-5%, but downgraded organic adjusted EBIT growth to the following range: a low-single-digit or low-single-digit decline to an increase (from low-single-digit growth before) compared with 4.6% organic growth and negative 2% EBIT growth in our updated model. From a regional perspective, Europe’s underperformance was driven by continued weakness in volumes/mix down 8.6% versus down 12.7% in second-half 2022. This was a result of the lasting effects of second-half 2022 delistings in Europe including Germany, France, and the U.K. during price negotiations (the firm aggressively hiked prices ahead of peers). The firm now believes it will take more time to rebuild lost distribution, but expects products to be back on the shelves at the end of second-quarter 2023. JDE Peet’s is currently discontinuing international brands in the Russian market due to the war in Ukraine. Rebranding the Jacobs brand in Russia resulted in an impairment of EUR 185 million in first-half 2023.

Given lower bottom-line guidance and continued weakness in Europe, we reduce our fair value estimate for JDE Peet’s to EUR 30.50 from EUR 32.50, largely reflecting lower 2023 adjusted EBIT growth (negative 2% at the low end of guidance, from 4% growth before).