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Can Brown-Forman (BF.B) Beat on Q1 Earnings Amid Tariff Woes?

Zacks Equity Research

Brown-Forman Corporation BF.B is set to release first-quarter fiscal 2020 results on Aug 28, before the market opens.

Notably, the leading producer and distributor of premium alcoholic beverages delivered positive earnings surprise in the last eight quarters. The company’s average earnings beat in the trailing four quarters was 6.9%.

Brown-Forman Corporation Price and EPS Surprise

 

Brown-Forman Corporation Price and EPS Surprise

Brown-Forman Corporation price-eps-surprise | Brown-Forman Corporation Quote

Let’s see how things are shaping up prior to the earnings announcement.

How Are Estimates Faring

The Zacks Consensus Estimate for the company’s fiscal first-quarter earnings is pegged at 37 cents, which suggests a 9.8% decline from the year-ago quarter’s reported figure. Notably, the consensus mark has remained unchanged in the past 30 days. The consensus mark for fiscal first-quarter sales is pegged at $772.2 million, indicating 0.8% growth from the prior-year quarter’s reported number.

Factors at Play

Brown-Forman is witnessing a positive earnings surprise trend on its robust brand portfolio, expansion plans, product innovation and shareholder-friendly initiatives. The company is experiencing solid improvement in underlying sales, owing to broad-based growth across geographies and balanced contribution from brand portfolio. Its underlying sales improved for the 11th straight time in the last reported quarter.

Notably, the company is gaining from sustained sales growth in its portfolio of premium spirit brands, particularly bourbon and tequila. Additionally, international expansion for the Jack Daniel’s trademark remains a major contributor to sales growth. These trends are again likely to aid the company’s first-quarter fiscal 2020 earnings and sales outcomes.

Additionally, we expect its continued focus on pricing, product innovation and expanding operations in emerging markets to boost operational performance and strengthen market position. This should reflect meaningful gains in the upcoming quarterly release.

While the company’s top and bottom-line performances have remained favorable in the past several quarters, retaliatory tariffs imposed on American spirits are affecting top and bottom lines to some extent. Further, higher tariffs and input costs have been denting the company’s margin performance.

It witnessed impacts of cost of tariff on underlying net sales in the fourth quarter and fiscal 2019, apart from impacts on cost of sales and gross margin. Underlying net sales in the fourth quarter and fiscal 2019 included negative impact of nearly one percentage point from lower net prices to distributors in certain markets to offset additional tariff-related costs.

Additionally, the company’s gross margin reflected impacts of tariff-related costs in the last few quarters. In fiscal 2019, gross margin contracted 260 bps, of which decline of 160 bps was due to tariffs and most of the remaining was attributed to higher input costs, including agave and wood. Clearly, tariff-related costs are likely to pose headwinds for the company’s first-quarter fiscal 2020 performance as well.

One key reason why tariff increases are largely hurting Brown-Forman is its widespread presence in international markets, which significantly contributes to total sales. Further, the company produces most spirits in the United States, which is attracting larger exports to foreign lands. Notably, Brown-Forman’s products account for nearly 60% of the American whiskey business in Europe, resulting in large exports.

Consequently, the cost of tariffs on American whiskey implemented by the European Union in response to the U.S. tariff increases is hurting Brown-Forman’s performance. Moreover, its American whiskey strategy mainly focuses on building a market for its super-premium brands, such as Gentleman Jack and Woodford Reserve in Europe. With business in Europe being a large part of the strategy, it expects the tariffs implemented by the European Union to be a hindrance for its American whiskey strategy in the near term.

The sheer consequences of higher tariffs are reflected in the company’s guidance for fiscal 2020. It expects gross margin for fiscal 2020 to be impacted by the persistence of tariffs and higher input cost-related headwinds. This is likely to result in a 200-bps decline in gross margin in fiscal 2020. The company expects impacts of tariff-related costs to persist throughout fiscal 2020, whereas it witnessed the same in seven months in fiscal 2019. Additionally, it expects higher input costs, primarily related to agave as well as ongoing wood inflation, to be an even greater drag on the gross margin in fiscal 2020. Backed by this bleak outlook for fiscal 2020, we expect visible impacts of the aforementioned headwinds in the fiscal first quarter.

In addition to tariff woes, Brown-Forman’s cross-border presence exposes it to negative impacts of adverse currency rates. In fiscal 2019, unfavorable currency rates impacted net sales by nearly 2 percentage points and operating income by 3 points. Moreover, we expect these headwinds to continue in fiscal 2020, with the fiscal first quarter being no exception.

Nevertheless, the company remains confident that it will capitalize on its American Whiskey strategy while benefiting from investments in its brands’ portfolio over the years. Amid tariff-related woes, these positives can keep Brown-Forman going.

A Look at the Zacks Model

Our proven model does not predict that Brown-Forman is likely to beat earnings estimates in first-quarter fiscal 2020. This is because a stock needs to have — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Brown-Forman currently has a Zacks Rank #2, its Earnings ESP of 0.00% makes surprise prediction difficult.

Stocks Poised to Beat Estimates

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Caseys General Stores, Inc. CASY presently has an Earnings ESP of +8.43% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Target Corporation TGT currently has an Earnings ESP of +1.04% and a Zacks Rank #2.

Burlington Stores, Inc. BURL has an Earnings ESP of +1.13% and a Zacks Rank #2 at present.

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Brown-Forman Corporation (BF.B) : Free Stock Analysis Report
 
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