We've maintained for some time that spirits giant Diageo's premium positioning leaves the company's portfolio more vulnerable to consumer down-trading in this weak economy, and first-half results bear this out. We're maintaining our fair value estimate at this time.
In the half, internal net sales and internal operating profit declined 2% and 3%, respectively. Sales declined 6% in the first quarter, which management blamed on a difficult comparison with a strong year-ago quarter when inventories needed replenishing, but trading down bore part of the blame. However, sales trends began to tick up in the second quarter, and management has indicated that inventory levels across all regions remain low, setting the stage for volume growth. For the year, we forecast a 1% increase in internal sales.
Although management maintained its outlook for low-single-digit internal operating profit growth for the year, the 3% decline in this metric in the first half was a real disappointment, in our eyes. Despite media rate deflation, reduced marketing spending, and operational efficiencies, the lower top line and less profitable mix shift put added pressure on profits. For the year, we forecast 4% internal operating profit growth, but we may reduce this slightly. Next week we're attending the Consumer Analyst Group of New York conference, and we expect Diageo to address the key drivers underlying its operating profit outlook at that time.
