It's a rough morning for the company behind your Smirnoff vodka and Guinness stout. Shares of Diageo Plc (DEO) are taking a beating after the global spirits giant served up weaker-than-expected earnings and a sobering outlook for the rest of its fiscal year.

The core issue? Consumers, particularly in the United States, are feeling the pinch and opting for cheaper alternatives. Meanwhile, the Chinese market for premium white spirits continues to be a headache.

The Numbers Tell the Story

For the half-year ended December 2025, Diageo reported net sales of $10.5 billion. That's a notable miss compared to the $11.11 billion analysts were expecting. Sales declined 4% overall, driven by a 2.8% drop in organic net sales (which excludes the impact of acquisitions and disposals) and the effect of selling off some assets.

Digging into that organic decline, it was a combination of selling slightly less volume (down 0.9%) and getting less favorable pricing and product mix (down 1.9%). Adjusted earnings per share came in at 95 cents, down 2.5% and just missing the street's expectation of 96 cents.

It wasn't all bad news on the profit front. The company's operating profit margin actually expanded by 85 basis points, thanks in part to those asset sales. Operating cash flow was a healthy $2.1 billion, with free cash flow at $1.5 billion. The company's net debt stood at $21.7 billion as of December 31.

Where the Pain Is

CEO Sir Dave Lewis laid out the geographic split clearly. "Strong performance in Europe, LAC and Africa, was offset by a weakening performance in NAM and continued weakness in Chinese white spirits in APAC," he said.

Translation: Things are going well in many parts of the world, but not in North America (NAM) and Asia-Pacific (APAC), specifically China.

Lewis was even more direct about the U.S. market, which is crucial for Diageo's premium spirits. "U.S. Spirits performance reflected pressure on disposable income, and competitive pressure from more affordable alternatives addressing a more stretched consumer wallet."

In simpler terms, when money gets tight, people might still buy alcohol, but they're trading down from Diageo's pricier brands to cheaper options.

A Dimmer Outlook

Given the weaker-than-expected first half, especially in the U.S., Diageo had to reset expectations for the full 2026 fiscal year. The new guidance is significantly softer.

The company now expects organic net sales to decline 2% to 3% for the year. That's down from prior guidance of sales being roughly flat to slightly down. This forecast includes the ongoing drag from the weak Chinese white spirits market.

On the profit side, the company now expects organic operating profit to be flat or grow by a low single-digit percentage. Its previous outlook called for low-to-mid single-digit growth. The company cited the weaker sales outlook and the impact of tariffs as reasons for the cut.

There was one piece of guidance the company held firm on: free cash flow. Diageo reiterated its expectation to generate about $3 billion in free cash flow for the year. It also noted that its cost savings program is on track, with about half of the accelerated savings expected to land this fiscal year.

The market's reaction was swift and severe. At the time of publication, Diageo shares were trading down 13.60% at $88.21.