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Off-Premise & Brand Investments to Drive Brown-Forman's Growth

Zacks Equity Research
·6 min read

Brown-Forman Corporation BF.B stock has been trending up the charts despite the doldrums in on-premise channel, driven by its efforts to capitalize on opportunities in the shift in consumption to at-home occasions.  The rise in this trend led to significant gains in the off-premise and e-premise channels as well as boosted demand for spirit-based RTD cocktails. These trends aided the company’s first-quarter fiscal 2021 performance, wherein earnings and sales topped the Zacks Consensus Estimate.

Apart from aiding the quarterly results, the effects of growth in the off-premise and e-premise channels have been boosting stock performance. Notably, shares of the company have gained 20.6% in the past three months compared with the industry’s growth of 8.2%.



Further, the Zacks Rank #2 (Buy) stock has outpaced the Consumer Staples sector’s growth of 7.6% and the S&P 500 index’s rise of 8.9% for the same period. Moreover, the company’s shares have witnessed robust growth of 9.3% since reporting strong first-quarter fiscal 2021 results on Sep 2.

Factors Driving Growth

Brown-Forman is capitalizing on the shift in consumption to at-home occasions, with increased investments in the off-premise and e-premise channels. Further, the company is witnessing an acceleration in trends for the spirits business in the past few months, as people are unable to spend on travel and other forms of entertainment. The closure of bars has given rise to a trend of making cocktails and margaritas at home, which is primarily aiding the company’s spirits and tequila portfolios. Additionally, it is aiding the sale of spirits in the off-premise, which is likely to continue.

Notably, the company’s Jack Daniel's Tennessee Honey and Apple brands are providing consumers ease in making flavorful yet simple cocktails easily at home. This trend also led to the early success of the Drinkworks partnership and launch of its first branded cocktail — the Jack Daniel’s Lynchburg Lemonade. Moreover, there has been an increased demand for the company’s ready-to-drink (RTDs) cocktails during the pandemic. This has led to increased sales for its Jack Daniels RTDs globally as well as the tequila-based New Mix RTDs in Mexico.

Notably, Brown-Forman’s consolidated underlying sales in the fiscal first quarter were up 3% year over year, driven by gains in the United States and developed international markets despite the pandemic-related disruptions. On a geographic basis, underlying sales growth was the strongest in developed international markets, growing 12%. Meanwhile, underlying net sales in the United States, which is the company’s largest market, were up 9%.

Gains in the developed international markets and the United States were led by Jack Daniel’s RTDs, the launch of Jack Daniel’s Tennessee Apple in a number of countries and Jack Daniel’s Tennessee Honey. Growth in the United States additionally benefited from rising consumer demand for the newly launched spirits-based RTDs. It also witnessed strong gains in underlying net sales in aggregate for premium bourbons, including Woodford Reserve and Old Forester.

Apart from aforementioned growth in off-premise and geographies, the company’s earnings for the fiscal first quarter reflected gains from stringent cost discipline. Despite a decline in net sales and gross margin, Brown-Forman managed to report strong operating income growth in the fiscal first quarter mainly on the back of stringent cost-management initiatives.

Notably, selling, general and administrative (SG&A) expenses declined 10% year over year on both reported and underlying basis due to lower discretionary spending, owing to its focus on cost management. Advertising expenses of $62 million declined 33% on a reported basis and 17% on an underlying basis. The decline in advertising investments can be attributed to the phasing of spending, a reduction in on-premise activations, and the cancellation of consumer events and sponsorships, given the current environment.

Driven by the strong operating expense leverage, operating income rose 56% on a reported basis and 15% on an underlying basis in the fiscal first quarter. Meanwhile, the operating margin expanded substantially to 51.4% from 31.4% in the year-ago quarter.

Looking forward, the company expects no recovery in the Travel Retail business in the near term and anticipates a significant decline on a year-over-year basis for fiscal 2021. Further, it remains uncertain about the timing and strength in the recovery of the on-premise channel due to varied factors. In all, it does not expect the on-premise business to return to full capacity in fiscal 2021. Further, it expects gross margin pressures to continue in fiscal 2021, owing to higher input costs and mix shift. It expects advertising investments to accelerate as the environment evolves.

Nonetheless, we believe the company is well-poised to steer through the uncertain environment on its growing footing off-premise and e-premise as well as the improving trends for at-home consumption occasions. These are likely to significantly offset the declines due to slow on-premise and Travel Retail recoveries.

Looking for Other Favorable Beverage Stocks? Check These

The Boston Beer Company, Inc. SAM has an earnings surprise of 26.1%, on average, for the trailing four quarters. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Monster Beverage Corporation MNST, also a Zacks Rank #1 stock, has a long-term earnings growth rate of nearly 12%.

Anheuser-Busch InBev SANV BUD has delivered an earnings surprise of 48.4% in the last reported quarter.  It currently has a Zacks Rank #2.

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BrownForman Corporation (BF.B) : Free Stock Analysis Report
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