Pernod Ricard Earnings: Strong Finish to Fiscal 2023, but Clouds Loom in U.S. and China

Pernod Ricard RI reported a respectable performance in fiscal 2023, with revenue in line with our expectations on an organic basis, but management’s comments that the U.S. and China are off to a slow start in fiscal 2024 is likely to cause investors some concern about the durability of the strength of the consumer. On a positive note, margins remained robust. We have slightly lowered our growth forecasts for these two regions for next year, but this has an immaterial effect on our EUR 185 fair value estimate, and as the slowdown is cyclical rather than structural, nothing in the company’s update impacts our wide economic moat rating. The market value of the shares is now close to our fair value estimate, as at the close of trading on Aug. 31, and while we think Pernod is a very strong franchise with more superior price/mix growth drivers than most of the consumer products group, we recommend waiting for a more attractive entry point before building a position.

Fourth-quarter revenue grew by 19% year over year on an organic basis to EUR 12.1 billion, a strong sequential reversal from the 2% decline in the third quarter. This was a whisker above our expectations, driven by the healthy 14% organic growth in Europe. Although the Asia/rest of the world segment reported very strong fourth-quarter organic growth of 36%, management stated that sales in China in the first quarter had fallen year over year. It is becoming increasingly difficult to overlook the signs that consumers in both the U.S. and China are beginning to wobble, particularly in affordable luxury categories such as spirits. Diageo has reported soft U.S. sales in recent months as disposable income is being absorbed by broad-based inflation. In China, the New Year festival, which occurred in Pernod’s third fiscal quarter, was an early signal that disposable income may be softening, and the second half of 2023 may also be challenging.