News of a new CEO appointment sent the Diageo (LSE:DGE) share price up 7.5% on Monday (10 November) morning. But a change of leadership isn’t the only thing the company needs.
Sir Dave Lewis has some impressive credentials, but a lot of the firm’s recent challenges have been to do with things beyond its control. So can investors expect the stock to rally?
Same problems?
The new CEO is coming into a difficult situation. Diageo’s been facing challenges from high inventory levels, weak consumer spending, and the rise of GLP-1 drugs. These are all interconnected, though they present varying degrees of challenge for the firm. Inventory levels at US wholesalers, for example, I expect to normalise over time.
With consumer spending, I anticipate things getting worse before they get better. And the increasing use of GLP-1 drugs looks like a long-term challenge, though its scope’s unclear.
Diageo can’t directly do anything about these issues, but what it can do is focus on the things that are under its control. And this is where the significance of the new CEO comes in.
Self-help
Lewis has a well-earned reputation from his time at both Tesco and Unilever as someone who isn’t afraid to take drastic action. And that might be good for Diageo.
Pressure on sales and profits has pushed the company’s leverage ratio to an unusually high level. And reducing debt is something that the new CEO dealt with very effectively at Tesco.
On top of this, the FTSE 100 drinks firm has been widely reported to be considering selling off some of its weaker lines. That’s another area where Lewis has been successful in the past.
While there are clearly challenges that aren’t under the CEO’s control, it’s encouraging to see the company looking to do what it can. But investors need to be realistic.
Outlook
The Diageo share price might have jumped on the news of the appointment, but turning around the business isn’t going to happen overnight. It’s going to take time. Lewis doesn’t start until January and even then, restructuring the firm’s portfolio (if that’s the plan) is going to be a lengthy process. So investors need to be prepared to wait.
Diageo’s situation looks similar to where Unilever was a couple of years ago. And selling off weaker brands to concentrate on stronger ones has helped generate growth for that business.
In the meantime, I expect the macroeconomic challenges the company has been facing to persist. So investors looking for quick returns from this point might be disappointed.
Holding on
After last week’s disappointing results, I said that my intention was to hold on to my Diageo shares. While the new CEO makes me a bit more optimistic, my view hasn’t really changed.
I still think the company’s facing a lot of challenges that are beyond its control. And my view remains that Debra Crew was very unfortunate to be in charge during a difficult period.
I am however, encouraged by the firm’s commitment to trying to make improvements where it can. I’m not expecting a dramatic recovery, but I’m happy to wait and see what happens.
