Investing.com -- Pernod Ricard (EPA:PERP), the French spirits giant, reported a disappointing first quarter of fiscal 2025, with sales hit hard by weakness in China.
Organic revenue for the quarter, which ended in September, fell 5.9%, slightly below analysts' expectations, as China’s economic slowdown weighed heavily on consumer demand.
While the company reiterated its full-year guidance, the performance in China raised fresh concerns about the outlook in one of its key markets.
“China softness (-26%) more pronounced than expected, with ongoing consumer weakness,” Jefferies said.
The company pointed to continued softness in consumer spending and a sharp decline compared to the previous year when sales had already fallen by 10%.
Jefferies said that expectations for China had been revised downward since Pernod’s full-year results, suggesting a more cautious outlook going forward.
Despite the disappointing numbers from China, Pernod Ricard’s performance in other regions was more positive. Sales in the Americas declined by 5%, but this was better than the 6% drop forecast by analysts.
In Europe, sales were in line with expectations, dipping 3%, while the company’s Asia Rest of World segment underperformed, with sales down 8%, compared to a forecasted 5.1% drop.
As China's demand has weakened, inventory adjustments in the U.S. have compounded Pernod Ricard's challenges.
These trends weighed heavily on the company’s reported sales, which fell 8.5%, a larger decline than the 7.1% expected by the market.
Analysts at Jefferies noted that while the quarter was slightly weaker than expected, Pernod Ricard’s reaffirmation of its full-year guidance could offer some relief to investors concerned about further declines.
The company maintained its outlook for the fiscal year, predicting a return to organic sales growth and sustained operating margins.
Analysts at Barclays raised doubts about Pernod Ricard's decision to uphold its full-year guidance for net sales growth and margin expansion, as well as its medium-term target of achieving organic sales growth at the upper end of 4-7%, with 50-60 basis points of margin improvement.
“We think both will require a marked improvement in fortunes, but more realistically expect both to be cut,” Barclays said.
However, Jefferies analysts warned that China’s continuing struggles would likely remain a headwind in the near term.
Inventory issues in the U.S. and a weaker pricing environment, coupled with unfavorable geographic sales mix, also contributed to the quarter’s soft results.
“US inventory destocking continues; until sell-out trends stabilise, we believe continuous inventory adjustment will be required,” said analysts at Morgan Stanley in a note.
Price mix was down 6%, though volumes remained flat, signaling a shift in consumer behavior away from higher-priced products.
While Pernod Ricard’s earnings may be nearing a trough, Jefferies analysts suggested that the company could still face challenges as visibility into the China market remains limited.
Jefferies added that, after a 20% cut in earnings estimates over the last 16 months, the worst may be behind Pernod Ricard, as previous downturns in the spirits industry typically lasted between 12 and 15 months.
On the brighter side, the company saw solid performances in markets like Japan, Canada, Poland, Brazil, Turkey, and Nigeria, as well as strong growth in travel retail in both the Americas and Europe.
India showed signs of recovery, with sales improving 2% in the first quarter and expected to build momentum throughout the fiscal year.