A month has gone by since the last earnings report for Brown-Forman Corporation (BF.B). Shares have lost about 1.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Brown-Forman Corporation due for a breakout? 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 catalysts.
Brown-Forman Tops Q1 Earnings & Sales, Trims View
Brown-Forman Corporation delivered first-quarter fiscal 2019 results, wherein both earnings and sales topped estimates. This marked the company’s fifth straight quarter of earnings and sales beat. Earnings per share of 41 cents increased 12% and surpassed the Zacks Consensus Estimate of 39 cents.
Net sales improved about 6% year over year to $766 million and beat the Zacks Consensus Estimate of $756.4 million. The increase was driven by strong consumer demand for its premium American whiskey brands. On an underlying basis (excluding negative currency impact and other adjustments), sales increased 9%, marking the eighth straight quarterly growth.
The company’s robust underlying sales performance can be attributed to broad-based growth across geographies and balanced contribution from its portfolio of brands. On a geographic basis, underlying sales grew 16% in developed international markets, 11% in emerging markets and 2% in the United States. Growth across its portfolio was led by Jack Daniel’s family of brands, which reported 10% underlying sales growth. Underlying sales for the company’s super-premium American whiskey brands grew 25% while Herradura and el Jimador grew 10% and 11%, respectively.
Quarter in Detail
Brown-Forman’s gross profit increased nearly 6% to $523 million while gross margin expanded 10 basis points (bps) to 68.2%. On an underlying basis, gross profit increased 9%.
Selling, general and administrative (SG&A) expenses increased about 4% year over year to $168 million while increasing 5% on an underlying basis. The rise in SG&A expenses can be attributed to higher personnel costs. Additionally, advertising expenses rose 14% year over year to $98 million and 17% on an underlying basis. The increase stemmed from continued investments in its portfolio of brands, including the new Woodford Reserve Kentucky Derby sponsorship.
Operating income improved 7% to $264 million, with operating margin expanding 50 bps to 34.5%. On an underlying basis, operating income increased 10%.
Balance Sheet & Cash Flow
Brown-Forman ended first-quarter fiscal 2019 with cash and cash equivalents of $211 million and long-term debt of $2,310 million. The company’s total shareholders’ equity was $1,368 million as of Jul 31, 2018.
In first-quarter fiscal 2019, the company generated $126 million cash from operating activities.
On Jul 13, it authorized a share repurchase program worth $200 million, effective through Jul 12, 2019. Additionally, it declared a quarterly cash dividend of 15.8 cents per share on Class An and Class B shares on Jul 26.
Fiscal 2019 Outlook
The company believes that the global economic environment has improved in the past year, with favorable conditions in many emerging markets. However, it notes that competition has intensified in the developed economies, alongside rising concerns of the recently enacted retaliatory tariffs on American whiskey. This has made prediction of the company’s near-term results difficult.
In fiscal 2019, the company lowered its earnings per share view to reflect the net estimated changes in operating income growth due to the imposition of tariffs. It now estimates earnings per share of $1.65-$1.75, reflecting 11-18% increase. Earlier, the company projected earnings per share of $1.75-$1.85, reflecting 18-25% increase.
Moreover, the company projects underlying sales growth of 6-7%. In fiscal 2019, the company expects underlying SG&A expenses to increase modestly while underlying A&P is expected to increase in line with underlying sales growth. Additionally, underlying operating income is anticipated to increase 4-6% compared with the previous guidance of 7-9% growth.
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 -5.25% due to these changes.
At this time, Brown-Forman Corporation has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. 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 this revision indicates a downward shift. It's no surprise Brown-Forman Corporation has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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