Brown-Forman Beats on EPS

Zacks

Driven by positive top-line growth along with lower input costs, Brown-Forman Corporation (BF.B) started the fiscal 2013 with strong first-quarter results. The company’s adjusted earnings for the quarter surged 27.8% to 69 cents per share from 54 cents earned in the previous-year quarter, beating the Zacks Consensus Estimate of 62 cents.

Quarterly Details

Brown-Forman's net sales grew 4% to $878.1 million compared with $840.3 million in the year-ago period primarily driven by price increase partially offset by adverse currency exchange rates and spin-off of Hopland wine business. On an underlying basis, the company’s net sales registered 10% growth year over year. However, quarterly sales were below the Zacks Consensus Estimate of $893 million.

During the quarter, Brown-Forman’s gross profit increased 10% to $464.1 million from $420.3 million primarily due to lower input costs. Consequently, gross margin improved 290 basis points (bps) to 52.9% compared with 50% in the prior-year period.

As a percentage of net sales, the company’s operating expenses grew 130 bps to 28.6% primarily due to deleveraged selling, general and administrative expenses, which increased 40 bps to 16.9%, partially offset by a leverage of 30 bps in advertising expenses.

Operating profit during the quarter increased 19% to $221.7 million from $185.9 in the prior-year period, primarily driven by improved gross profit, partially offset by increased operating expenses. Consequently, operating margin expanded 310 bps to 25.2% compared with 22.1% in the year-ago quarter.

Balance Sheet & Cash Flow

Brown-Forman ended the quarter with cash and cash equivalents of $361.5 million and long-term debt of $502.1 million. During the quarter, Brown-Forman generated $87.6 million of cash from operations and deployed $49.8 million for dividend payout and $17.4 million on capital expenditures.

Guidance

Moving forward, Brown-Forman confirmed its outlook for fiscal 2013. The company expects improvement in customer trends to continue in second quarter of fiscal 2013. However, it anticipates that the stronger U.S. dollar value may have an adverse impact on its bottom line.

Currently, Brown-Forman expects fiscal 2013 earnings in the range of $2.40 - $2.67 per share.

Our Recommendation

We believe Brown-Forman’s strategy of expanding Jack Daniel's market share in developed markets, such as France and the U.S., and emerging markets including Russia, Poland and Mexico, where the whiskey category is in early stages of development, will boost its top line.

However, apart from macroeconomic headwinds, distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., European and many emerging markets may lead to increasing risk of a potential excise tax on spirits by the governments of respective countries. The effect of hike in excise tax in the future may have an adverse effect on Brown-Forman’s financial performance.

Above all, the company faces intense competition from other well-established players in the industry, such as Beam Inc. (BEAM), Constellation Brands Inc. (STZ) and Diageo plc (DEO). Moreover, Brown-Forman encounters competition from local and regional players in the respective countries. Consequently, this may dent the company’s future operating performance.

Currently, Brown-Forman has a Zacks #3 Rank, which implies a short-term Hold rating. Moreover, we maintain a long-term ‘Neutral’ recommendation on the stock.

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