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A month has gone by since the last earnings report for Brown-Forman Corporation (BF.B). Shares have added about 5.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Brown-Forman Corporation 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 & Sales Beat
Brown-Forman reported solid second-quarter fiscal 2020 results, wherein earnings and sales surpassed estimates. Further, top and bottom lines improved on a year-over-year basis. Moreover, the company reiterated earnings and sales view for fiscal 2020. However, the company lowered the underlying operating income view for fiscal 2020.
Earnings per share of 59 cents increased 14% year over year and surpassed the Zacks Consensus Estimate of 53 cents.
Net sales of $989 million beat the Zacks Consensus Estimate of $974 million and improved 9% on a reported basis. On an underlying basis, net sales rose 6%. In the quarter, the company witnessed broad-based growth across geographies and the brand portfolio.
For the first six months of fiscal 2020, underlying sales improved 3%. On a geographic basis, underlying sales growth was the strongest in the United States on continued double-digit gains from its premium bourbons, Woodford Reserve and Old Forester. Additionally, it witnessed double-digit underlying net sales gains in aggregate from tequilas, Herradura and el Jimador, in the United States. Underlying net sales grew 6% in the United States, 2% in developed international markets and 5% in emerging markets.
Growth across the company’s brand portfolio was led by Woodford Reserve, which reported 20% underlying sales growth in the first six months of fiscal 2020. Notably, underlying sales for its premium bourbon brands, including Woodford Reserve and Old Forester, grew 22%.
Meanwhile, its tequila brands reported double-digit underlying sales growth globally, including a 19% increase for Herradura and 13% for el Jimador. Further, underlying net sales for the Jack Daniel’s family of brands improved 2% globally, driven by the launch of Jack Daniel’s Tennessee Apple in the United States, and broad-based growth for Jack Daniel’s RTDs and Jack Daniel’s Tennessee Honey. However, underlying sales for Finlandia vodka dipped 7%.
Margins & Costs
In the fiscal second quarter, Brown-Forman’s gross profit declined nearly 5% to $619 million, while gross margin contracted 220 basis points (bps) to 62.6%. On an underlying basis, gross profit remained flat.
Selling, general and administrative (SG&A) expenses moved down 1% year over year to $158 million, both on a reported and underlying basis. Advertising expenses rose 10% year over year to $112 million and 11% on an underlying basis.
Operating income increased 6% to $352 million on a reported basis but declined 3% on an underlying basis. Meanwhile, operating margin contracted 90 bps to 35.6%.
Balance Sheet & Cash Flow
Brown-Forman ended second-quarter fiscal 2020 with cash and cash equivalents of $235 million, and long-term debt of $2,288 million. Its total shareholders’ equity was $1,942 million as of Oct 31, 2019. In the first six months of fiscal 2020, it generated $187 million in cash from operating activities.
On Nov 21, the company declared a quarterly cash dividend of 17.43 cents per share on Class A and Class B shares, reflecting an annualized dividend rate of 69.72 cents. The dividend is payable Jan 2, 2020, to shareholders of record as of Dec 5, 2019.
Fiscal 2020 Outlook
For fiscal 2020, the company reiterated the earnings and sales outlook for fiscal 2020. It expects earnings per share of $1.75-$1.85, with underlying sales growth of 5-7%.
However, the company lowered the underlying operating income view for fiscal 2020. Based on uncertain economic and geopolitical environments in certain emerging markets and the Travel Retail channel as well as higher input costs, it lowered underlying operating income growth by 1 percentage point. It now anticipates 2-4% rise in underlying operating income for the fiscal year compared with 3-5% growth mentioned earlier.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
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 F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. 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 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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