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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% 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 catalysts.
Brown-Forman Q2 Earnings Miss, Sales Beat Estimates
Brown-Forman reported second-quarter fiscal 2021 results, wherein earnings missed the Zacks Consensus Estimate but sales beat the same. Earnings per share of 50 cents declined 15% year over year and missed the Zacks Consensus Estimate of 51 cents. Lower-than-expected earnings can be attributed to higher costs, which offset the top line.
Net sales of $985 million beat the Zacks Consensus Estimate of $967.2 million and were flat year over year on a reported basis. On an underlying basis, net sales rose 4%. In the first half of fiscal 2021, reported sales declined 1%, while underlying sales improved 4%. The top line benefited from strong volume growth, offset by a decline in price/mix.
The company reported volume growth of 15% in the first half of fiscal 2021, aided by New Mix and the Jack Daniel’s family of brands. Price/mix dropped 12% 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. Given the unpredictable nature of the COVID-19 pandemic, the company did not provide any guidance for fiscal 2021.
In the first half 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 developed international markets, growing 10% in the first half of fiscal 2021. Meanwhile, underlying net sales in the United States, the company’s largest market, were up 9%. However, underlying sales in the emerging markets were flat in the first half of fiscal 2021. Gains in the developed international markets were led by Jack Daniel’s RTDs, the launch of Jack Daniel’s Tennessee Apple in a number of countries, Jack Daniel’s Tennessee Honey, and Gentleman Jack.
Growth in the United States was driven by rising consumer demand for Jack Daniel’s RTDs, including the newly-launched spirits-based RTDs as well as the launch of Jack Daniel’s Tennessee Honey and Gentleman Jack. Additionally, it witnessed strong volumetric gains for premium bourbons, including Woodford Reserve and Old Forester. Moreover, the company 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 witnessed sequential gains in the emerging markets in the fiscal second quarter, which resulted in flat underlying sales for the first half of fiscal 2021. The improvement was led by gains in Mexico, Brazil and Poland. This was partly offset by Southeast Asia, Russia, India and several Latin American 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 22% growth in underlying net sales in the first half of the fiscal year. This growth was led by double-digit growth in underlying sales for Woodford Reserve and Old Forester. Meanwhile, its tequila brands reported a 13% rise in underlying sales growth globally, driven by robust volume-led underlying net sales growth from New Mix in Mexico and el Jimador in the United States. Further, 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 were offset by the unfavorable channel mix shift in Jack Daniel’s Tennessee Whiskey.
However, Herradura’s underlying net sales declined 2%, driven by lower volumes, primarily in Mexico, offset double-digit growth in the United States. Underlying sales for the company’s non-branded business, comprising used barrels, bulk whiskey and contract bottling declined 33% on lower demand and pricing for used barrels.
Margins & Costs
In second-quarter fiscal 2021, Brown-Forman’s gross profit declined 6% to $581 million, while gross margin contracted 370 basis points (bps) to 59%. On an underlying basis, gross profit remained flat year over year. The decline in gross margin can be attributed to higher input costs and unfavorable 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 declined 2% year over year on both reported and underlying basis to $155 million. Decline in SG&A expenses reflected strict control on discretionary spending during the quarter. Advertising expenses of $95 million declined 15% on both reported and 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. However, the company expects advertising spending to accelerate significantly over the balance of the fiscal year.
Operating income fell 6% to $330 million on both reported and underlying basis. Operating margin declined 300 bps to 33.5% from in the fiscal second quarter. The decline in gross margin was partly offset by strong operating expense leverage.
Balance Sheet & Cash Flow
Brown-Forman ended the first half of fiscal 2021, with cash and cash equivalents of $964 million, and long-term debt of $2,309 million. Its total shareholders’ equity was $2,403 million as of Oct 31, 2020. In the first half of fiscal 2021, it generated $147 million in cash from operating activities.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -6.49% due to these changes.
Currently, Brown-Forman B has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. 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 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 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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