Pernod Ricard Earnings: Broad-Based Slowdown in Third Quarter but Growth Should Reaccelerate

Pernod Ricard RI reported slightly weaker third-quarter sales growth than we had anticipated, with a broad-based slowdown, but this has no impact on our long-term view, and we make no changes to our wide moat rating and EUR 185 fair value estimate. We consider Pernod to be fully priced, and any wobble by the consumer would present downside risk, but with a strong fourth quarter, the company still seems likely to meet our full-year forecasts.

Third-quarter revenue fell by 2.2% on an organic basis, a sharp sequential reversal from the 12% organic growth in the first half of the year. On an underlying basis, however, we think performance was better than the headline numbers suggest, but growth is likely to still be slowing. For example, sales in China fell by 13% in the third quarter because of disappointing sales during the Lunar New Year season and unfavourable inventory phasing. Commentary from peer companies suggest end demand in China remains robust, however, and management stated that volume growth reaccelerated in March. We expect a stronger fourth quarter in China, particularly given that both domestic and outbound tourism should continue to recover, which should boost China and travel retail sales, respectively.

Similarly, although sales in the U.S. were surprisingly weak, with revenue declining by 11% by our estimate in the third quarter, management stated that depletions (sales by retail intermediaries to end consumers) remain positive. After this limited release of third-quarter sales data, more is now riding on fourth-quarter performance, in our view, while the stock appears to be pricing in unfettered demand growth. While we think that is unlikely, we continue to regard Pernod as a high-quality franchise with a strong portfolio in categories that benefit from scarcity of production, which we believe will drive above-average long-term growth.