A month has gone by since the last earnings report for Brown-Forman Corporation (BF.B). Shares have added about 6.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Brown-Forman Corporation due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Brown-Forman Q3 Earnings Beat, High Tariffs Hurt Sales
Brown-Forman Corporation has reported third-quarter fiscal 2019 results, wherein earnings topped estimates while sales lagged. This marked the company’s seventh straight quarter of earnings beat. However, sales missed estimates for the second consecutive quarter.
Earnings per share of 47 cents increased 20% year over year and surpassed the Zacks Consensus Estimate of 44 cents.
Net sales improved 3% year over year to $904 million, missing the Zacks Consensus Estimate of $907.4 million. This 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 4% on an underlying basis (excluding negative currency impact and other adjustments), marking tenth straight quarterly growth. Underlying net sales for the fiscal third quarter included negative impact of nearly one percentage point from lower net prices to distributors in certain markets to offset additional tariff-related costs.
Year to date, underlying sales have 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 its portfolio of brands.
On a geographic basis, year-to-date underlying sales growth has been the strongest in emerging markets. Underlying sales grew 4% in developed international markets, 10% in emerging markets and 4% 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 year to date. Underlying sales for the company’s super-premium American whiskey brands grew 24% while Herradura and el Jimador grew 14% and 15%, respectively.
In the fiscal third quarter, Brown-Forman’s gross profit declined nearly 3% to $571 million while gross margin contracted 370 basis points (bps) to 63.1%. On an underlying basis, gross profit increased 1%.
Selling, general and administrative (SG&A) expenses dropped 13% year over year to $149 million while it declined 11% 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. Additionally, advertising expenses declined 8% year over year to $103 million and were down 4% on an underlying basis.
Notably, the company’s operating performance benefited from its cost discipline, which helped negate some of the large burdens of retaliatory tariffs on American whiskey. Consequently, operating income improved 4%, on both reported and underlying basis, to $320 million. Meanwhile, operating margin expanded 40 bps to 35.3%.
Balance Sheet & Cash Flow
Brown-Forman ended third-quarter fiscal 2019 with cash and cash equivalents of $260 million, and long-term debt of $2,301 million. Its total shareholders’ equity was $1,493 million as of Jan 31, 2019.
In the first nine months of fiscal 2019, the company generated $577 million in cash from operating activities.
During the fiscal third quarter, the company bought back about 1.6 million of class An and class B shares for $78 million. With this, it completed its current share repurchase authorization of $200 million.
On Jan 29, the company declared a quarterly cash dividend of 16.6 cents per share on Class An and Class B shares, reflecting an annualized dividend rate of 66.4 cents. The dividend is payable on Apr 1, 2019, to shareholders of record as of March 4.
Fiscal 2019 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 2019, the company continues to expect earnings per share of $1.65-$1.75, assuming tariffs to remain in place for the fiscal year.
Moreover, the company projects underlying sales growth of 6-7%. For fiscal 2019, it expects modest decline in underlying SG&A expenses while underlying A&P is expected to be in line with net sales growth. Additionally, underlying operating income is anticipated to increase 4-6%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -7.76% due to these changes.
At this time, Brown-Forman Corporation has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Brown-Forman Corporation has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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