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A month has gone by since the last earnings report for Brown-Forman B (BF.B). Shares have added about 1.8% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Brown-Forman B 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-Form Q3 Earnings & Sales Beat on Volume Gains
Brown-Forman reported third-quarter fiscal 2021 results, wherein earnings and sales beat the Zacks Consensus Estimate. However, earnings declined on a year-over-year basis, while sales increased. Earnings per share of 45 cents declined 5% year over year but surpassed the Zacks Consensus Estimate of 43 cents. Lower-than-expected earnings can be attributed to higher costs and margins, which offset top-line growth.
Net sales of $911 million beat the Zacks Consensus Estimate of $906.5 million and improved 1% year over year on a reported basis. On an underlying basis, net sales remained flat with the prior-year quarter. In the first nine months of fiscal 2021, reported sales were flat, while underlying sales improved 2%. The top line benefited from strong volume growth, offset by a decline in price/mix.
The company reported volume growth of 11% in the first nine months of fiscal 2021, aided by New Mix and Jack Daniel’s RTDs. Price/mix dropped 9% due to unfavorable portfolio mix shift, with gains from lower-priced brands (like New Mix & Jack Daniel’s RTDs) and the unfavorable channel mix due to the pandemic-led restrictions on the on-premise channel across several developed markets globally.
Given the unpredictable nature of the COVID-19 pandemic, the company did not provide any guidance for fiscal 2021.
In the first nine months of fiscal 2021, underlying sales were driven by gains in the United States and developed international markets, partly offset by declines in Travel Retail and used barrels. On a geographic basis, underlying sales growth was the strongest in the United States and developed international markets, each registering growth of 7% in the first nine months of fiscal 2021.
Meanwhile, underlying sales in the emerging markets were up 1% in the first nine months of fiscal 2021. Gains in the developed international markets were led by Jack Daniel’s RTDs, the ongoing launch of Jack Daniel’s Tennessee Apple, Jack Daniel’s Tennessee Honey, and the company’s super-premium American and Scotch whiskeys. This along with growth in the off-premise channel was partly offset by lower volumes of Jack Daniel’s Tennessee Whiskey due to COVID-related restrictions on the on-premise channel.
Growth in the United States was driven by strong demand for Jack Daniel’s RTDs, Jack Daniel’s Tennessee Honey and Gentleman Jack. Additionally, the company witnessed strong volumetric gains for premium bourbons, including Woodford Reserve and Old Forester. Moreover, it witnessed strong underlying sales growth for Herradura and el Jimador in the United States. This was partly offset by declines in Jack Daniel’s Tennessee Whiskey, reflecting an unfavorable channel mix due to restrictions in the on-premise channel.
Meanwhile, the company’s emerging markets returned to growth in the fiscal third quarter. The improvement was led by gains in China, Brazil and Poland. This was partly offset by declines in Southeast, India and several Latin America markets, owing to the pandemic-related disruptions.
Growth across the company’s brand portfolio was led by premium bourbon brands, including Woodford Reserve and Old Forester, which reported 21% growth in underlying net sales in the first nine months of the fiscal year. The rise was led by double-digit growth in underlying sales for Woodford Reserve and Old Forester.
Meanwhile, the company’s tequila brands reported a 6% rise in underlying sales growth globally, driven by robust volume-led underlying net sales growth from New Mix in Mexico. Further, a double-digit increase in underlying net sales for el Jimador and Herradura in the United States was offset by lower volumes in Mexico. Underlying net sales for the Jack Daniel’s family of brands were up 2% globally as gains from Jack Daniel’s RTDs, Jack Daniel’s Tennessee Apple, Jack Daniel’s Tennessee Honey and Gentleman Jack. These were offset by the unfavorable channel mix shift in many developed international markets and the United States for the Jack Daniel’s Tennessee Whiskey due to on-premise restrictions.
Underlying sales for the company’s non-branded business, comprising used barrels, bulk whiskey and contract bottling, declined 34% on lower demand and pricing for used barrels.
Margins & Costs
In third-quarter fiscal 2021, Brown-Forman’s gross profit declined 1% year over year on both reported and underlying basis to $550 million, while gross margin contracted 150 basis points (bps) to 60.4%. The decline in gross margin can be attributed to higher input costs, lower fixed costs absorption, and unfavorable impacts from portfolio and channel mix shifts. The channel mix shift is mainly related to the pandemic-led restrictions in the on-premise channel, while the portfolio mix shift is attributed to the significant rise in sales of ready-to-drink products.
Selling, general and administrative (SG&A) expenses increased 3% year over year to $157 million on a reported basis. On an underlying basis, SG&A expenses were up 1% year over year.
Advertising expenses of $121 million accelerated 17% on a reported basis. On an underlying basis, advertising expenses increased 16% year over year. The increase in advertising investments can be attributed to the phasing of spending from the first half to the second half of fiscal 2021. The company expects advertising spending to accelerate significantly over the balance of the fiscal year.
Operating income fell 8% to $281 million on both reported and underlying basis. Operating margin declined 290 bps to 30.9% in the fiscal third quarter. The decline in operating income was driven by gross margin contraction as well as operating expense deleverage.
Balance Sheet & Cash Flow
Brown-Forman ended the fiscal third quarter, with cash and cash equivalents of $1,106 million, and long-term debt of $2,347 million. Its total shareholders’ equity was $2,468 million as of Jan 31, 2021. In the first nine months of fiscal 2021, it generated $120 million in cash from operating activities. Moreover, it generated free cash flow of $531 million in the first nine months of fiscal 2021.
The company declared a quarterly cash dividend of 17.95 cents per share on Class A and Class B shares.
Also, the board approved a $125-million capital investment plan to expand the bourbon-making capacity in Kentucky in response to the robust consumer demand.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -7.56% due to these changes.
At this time, Brown-Forman B has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. 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 broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Brown-Forman B has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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