A month has gone by since the last earnings report for Brown-Forman Corporation (BF.B). Shares have lost about 3.1% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.
Brown-Forman Q2 Earnings Beat Estimates, Sales Miss
Brown-Forman delivered second-quarter fiscal 2019 results, wherein earnings topped estimates while sales lagged. This marked the company’s sixth straight quarter of earnings beat. However, sales missed estimates after five consecutive beats.
Earnings per share of 52 cents increased 4% year over year and surpassed the Zacks Consensus Estimate of 51 cents.
Net sales were flat year over year at $910 million, missing the Zacks Consensus Estimate of $931.1 million. Sales were aided by strong consumer demand for its premium American whiskey brands, led by Jack Daniel’s and supported by Woodford Reserve. This was mostly offset by a negative currency impact.
On an underlying basis (excluding negative currency impact and other adjustments), sales increased 3%, marking the ninth straight quarterly growth. Underlying net sales for the fiscal second quarter included negative impact of nearly two percentage points from tariff-related inventory reductions (giveback) linked to the fiscal first quarter’s tariff-driven buy-ins.
Looking at year-to-date results, underlying sales improved 5% in the first half, including gains from tariff-related buy-ins in the fiscal first quarter, offset by the anticipated giveback materializing in the fiscal second quarter.
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, year-to-date underlying sales grew 5% in developed international markets, 10% 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 5% underlying sales growth year to date. Underlying sales for the company’s super-premium American whiskey brands grew 19% while Herradura and el Jimador grew 15% and 11%, respectively.
Quarter in Detail
Brown-Forman’s gross profit declined nearly 3% to $590 million while gross margin contracted 190 basis points (bps) to 64.8%. On an underlying basis, gross profit increased 1%.
Selling, general and administrative (SG&A) expenses dipped about 1% year over year to $161 million while increasing 1% on an underlying basis. The rise in SG&A expenses can be attributed to higher personnel costs. Additionally, advertising expenses declined 7% year over year to $102 million and were flat on an underlying basis.
Operating income declined 5% to $332 million, with operating margin contracting 170 bps to 36.5%. On an underlying basis, operating income remained flat.
Balance Sheet & Cash Flow
Brown-Forman ended second-quarter fiscal 2019 with cash and cash equivalents of $193 million, and long-term debt of $2,288 million. The company’s total shareholders’ equity was $1,497 million as of Oct 31, 2018. In the first half of fiscal 2019, the company generated $272 million in cash from operating activities.
During the fiscal second quarter, the company bought back about 2.6 million of class An and class B shares for $122 million. As of Oct 31, it had about $78 million worth of authorization remaining under its $200-million share repurchase program.
On Nov 15, the company declared a quarterly cash dividend of 16.6 cents per share on Class An and Class B shares, reflecting an increase of 5.1% from the prior dividend rate of 15.8 cents. The raised dividend is payable on Jan 2, 2019.
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 related to the recently enacted retaliatory tariffs on American whiskey. This made the prediction of the company’s 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%. In fiscal 2019, it expects underlying SG&A expenses to remain flat while underlying A&P is expected to increase in line with underlying 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 an upward trend in fresh estimates.
Currently, Brown-Forman Corporation has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, 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 trending upward for the stock, and the magnitude of this revision looks promising. 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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