Pernod Ricard Earnings: Despite Weak Volume in Q1, Guidance Suggests Robust Demand

Pernod Ricard RI reported a decline in volume in the first quarter, but guidance for growth in the full year suggests that management believes underlying demand remains reasonably strong, and that growth will return once Pernod cycles a strong performance in the first half of last year. We reiterate our wide moat rating and EUR 185 fair value estimate and there was around 11% upside to our valuation at the close of trading on Oct. 19. However, industry volume of spirits, which sell at a higher price point than some other alcoholic beverages such as beer and wine, have historically been more cyclical than other consumer product categories, so developments in the global macroeconomy will be key to unlocking that valuation upside in the next year or so.

First-quarter revenue declined organically by 2% year over year on an organic basis to EUR 3.0 billion, a sharp sequential reversal from the 19% increase in the fourth quarter of last year. However, the company was cycling a strong first quarter a year ago, and the two-year stacked organic growth rate of 13% remains above our medium-term expectations. Volume declined by 9%, mitigated by 7% price/mix. No margin data was provided, but this strong pricing seems likely to be sufficient to offset cost inflation. The volume decline was concentrated in two important markets, with organic net sales growth in both the U.S. and China being down 8%. Europe was better, with organic growth up 1%.

Management reiterated mid-term guidance of 4%-7% organic net sales growth and provided fairly vague guidance for fiscal 2024. The company expects broad-based organic net sales growth, implying a robust recovery in the remainder of the year, and an improved operating margin. While investors will be relieved in the bullish expectations for the rest of the year, and guidance is consistent with our forecasts, much will depend on the continued spending power of consumers next year.