Premium Spirits Will Face Declining Demand And Rising Costs

Key Takeaways

• Declining alcohol consumption and shifting consumer preferences pose persistent challenges to revenue growth and core brand performance.
  
• Rising regulatory costs, supply chain pressures, and retailer consolidation are threatening profitability and market share sustainability.
  
• Strong brand momentum, operational efficiency, capacity investments, premiumization, and geographic expansion position Campari for resilient growth, margin improvement, and buffered risk exposure.

Catalysts

Davide Campari-Milano N.V., together with its subsidiaries, markets and distributes alcoholic and non-alcoholic beverages in the Americas, the Middle East, Africa, Europe, and the Asia-Pacific.

• Shifting consumer preferences toward wellness and moderation, combined with increased health consciousness, are expected to result in a decline in overall alcohol consumption globally, creating persistent long-term headwinds for revenue growth across Campari's premium spirits portfolio.
  
• Escalating regulatory pressures and the threat of higher alcohol tariffs-particularly in the U.S., Europe, and Jamaica-are set to raise operational costs and could necessitate price hikes, potentially eroding both net margins and top-line growth, especially given the company's current limited pricing flexibility in an increasingly competitive environment.
  
• Campari remains heavily dependent on a core group of flagship brands like Aperol, Campari, and Espolòn; any onset of brand fatigue, shifts in consumer tastes away from these established products, or a failure to rejuvenate demand will have an outsized negative impact on revenue and earnings.
  
• Ongoing climate change and volatility in agricultural supply chains threaten the company's access to critical ingredients such as agave, citrus, and grains, likely resulting in cost inflation and gross margin compression that cannot be fully offset by portfolio premiumization or supply chain investments.
  
• With distribution channels consolidating and large retailers gaining more bargaining power, Campari is at risk of reduced shelf presence and increased marketing spend just to maintain current market share, which will further squeeze operating margins and diminish long-term earnings growth.

Davide Campari-Milano Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Davide Campari-Milano compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Davide Campari-Milano's revenue will grow by 2.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.6% today to 11.5% in 3 years time.
• The bearish analysts expect earnings to reach €378.4 million (and earnings per share of €0.35) by about July 2028, up from €201.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.6x on those 2028 earnings, down from 38.5x today. This future PE is lower than the current PE for the GB Beverage industry at 23.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.58%, as per the Simply Wall St company report.

Davide Campari-Milano Future Earnings Per Share Growth

Risks

• Strong sell-out growth and category outperformance across markets such as Germany (plus 8 percent versus sector down 1 percent), the UK (plus 13 percent versus sector down 1 percent), and multiple less-developed markets reporting double-digit increases show that Campari's brands continue to gain market share and consumer preference, which supports topline revenue expansion over the long term.
  
• Management's execution of cost containment initiatives, aimed at delivering 200 basis points in SG&A savings by 2027, together with already-visible reductions in SG&A growth, suggest improving operational leverage that is likely to sustainably boost operating margins and earnings in future periods.
  
• Strategic investments in production capacity expansion and IT infrastructure indicate that Campari is well-positioned to capture accelerated growth and scale efficiencies as demand returns, thus protecting and potentially increasing profitability during upswings in global consumption.
  
• Premiumization trends within Campari's core portfolio (e.g., Aperol, Espolòn, premium whiskeys) and a disciplined approach to pricing-even in a competitive environment-allow the company to defend and raise average selling prices, thus enhancing long-term net margins and supporting resilient earnings.
  
• Ongoing geographic diversification, evidenced by the company's strong performance in APAC (plus 11 percent organic growth), successful brand activations in Australia, and route-to-market investments in Asia and other underpenetrated regions, will diversify revenue streams and mitigate regional economic risks, bolstering overall revenue stability and potential for sustained growth.

Valuation

• The assumed bearish price target for Davide Campari-Milano is €4.09, which represents two standard deviations below the consensus price target of €6.61. This valuation is based on what can be assumed as the expectations of Davide Campari-Milano's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €10.0, and the most bearish reporting a price target of just €3.8.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €3.3 billion, earnings will come to €378.4 million, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 8.6%.
• Given the current share price of €6.46, the bearish analyst price target of €4.09 is 58.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.