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Brown-Forman (BF.B) Tops Q4 Earnings Estimates, Sales Lag

Zacks Equity Research

Brown-Forman Corporation BF.B has reported fourth-quarter fiscal 2019 results, wherein earnings topped estimates while sales lagged. This marked the company’s eighth straight quarter of earnings beat. However, sales missed estimates for the third consecutive time.

Overall, this Zacks Rank #4 (Sell) company’s shares have surged 6% in the past three months, outperforming the industry’s growth of 4.7%.

Earnings per share of 33 cents improved 47% year over year and surpassed the Zacks Consensus Estimate of 29 cents.

Brown-Forman Corporation Price, Consensus and EPS Surprise

Brown-Forman Corporation Price, Consensus and EPS Surprise

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

Net sales increased 1% year over year to $744 million, but missed the Zacks Consensus Estimate of $761.7 million. The year-over-year increase was driven by sustained sales growth for the company’s portfolio of premium spirits brands, particularly bourbon and tequila brands. Additionally, international expansion for the Jack Daniel’s trademark aided sales.

Sales increased 5% on an underlying basis (excluding negative currency impact and other adjustments), marking 11th straight quarterly growth. Underlying net sales for the fiscal fourth quarter included the negative impact of nearly one percentage point from tariff-related lower net prices to distributors in certain markets.

In fiscal 2019, underlying sales improved 5%, including about one percentage point impact of tariff-related lower net prices. The increase can be attributed to broad-based growth across geographies and balanced contribution from the company’s portfolio of brands.

On a geographic basis, in fiscal 2019, underlying sales growth was the strongest in emerging markets. Underlying sales grew 4% in developed international markets, 11% in emerging markets and 3% in the United States. Growth across the company’s portfolio was led by Jack Daniel’s family of brands, which reported 4% underlying sales growth in fiscal 2019. Underlying sales for the company’s premium bourbon brands, including Woodford Reserve and Old Forester, grew 23%, while Herradura and el Jimador grew 13% each. However, underlying net sales for Finlandia vodka’s dipped 1%.

Margins & Costs

In the fiscal fourth quarter, Brown-Forman’s gross profit declined nearly 6% to $482 million while gross margin contracted 500 basis points (bps) to 64.8%. On an underlying basis, gross profit declined 1%.

Selling, general and administrative (SG&A) expenses declined 39% year over year to $163 million and 13% on an underlying basis. The decrease in SG&A expenses can be attributed to continued focus on cost management and efficiency gains as well as fall in compensation-related costs. Advertising expenses declined 5% year over year to $93 million but increased 3% on an underlying basis.

Operating income improved 55% to $228 million and was up 9% on an underlying basis. Meanwhile, operating margin expanded to 30.6% from 20.1% in the year-ago quarter.

Balance Sheet & Cash Flow

Brown-Forman ended fiscal 2019 with cash and cash equivalents of $307 million, and long-term debt of $2,290 million. Its total shareholders’ equity was $1,647 million as of Apr 30, 2019. The company’s total debt of $2,440 million as of Apr 30, 2019 reflected a decline from $2,556 million at the end of fiscal 2018.

In fiscal 2019, the company generated $800 million in cash from operating activities.

In fiscal 2019, the company bought back about 4.2 million of class A and class B shares for $200 million, at an average price of $47 per share.

On May 23, the company declared a quarterly cash dividend of 16.6 cents per share on Class A and Class B shares, reflecting an annualized dividend rate of 66.4 cents. The dividend is payable on Jul 1, 2019, to shareholders of record as of Jun 6.

Fiscal 2020 Outlook

The company believes that fierce competition in developed economies as well as concerns related to the recently enacted retaliatory tariffs on American whiskey made the prediction of its near-term results difficult.

For fiscal 2020, the company expects earnings per share of $1.75-$1.85, with underlying sales growth of 5-7%. Underlying operating income is anticipated to increase 3-5%.

For fiscal 2020, the company expects gross margin to be impacted by the persistence of tariffs and higher input cost-related headwinds. However, it remains on track to return to high-single-digit growth in operating income beyond fiscal 2020.

Looking for Better-Ranked Beverage Stocks? Check These

Campari Corp. DVDCY has a long-term earnings growth rate of 7.5% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PepsiCo Inc. PEP has a long-term earnings growth rate of 7% and a Zacks Rank #2.

The Coca-Cola Company KO, also a Zacks Rank #2 stock, has a long-term earnings growth rate of 7.1%.

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