Brown-Forman (BF.B) Q1 Earnings Beat, Tariffs Hurt Sales

Brown-Forman Corporation BF.B has reported mixed first-quarter fiscal 2020 results, wherein earnings topped estimates while sales lagged. This marked the company’s ninth straight quarter of earnings beat. However, sales missed estimates for the fourth consecutive time. Results reflected significant impacts of tariff and timing of customer orders despite strength in the United States – the company’s largest market.

Overall, this Zacks Rank #2 (Buy) company’s shares have gained 16% in the past three months, outperforming the industry’s growth of 0.2%.

Earnings per share of 39 cents declined 6% year over year but surpassed the Zacks Consensus Estimate of 37 cents.

Net sales of $766 million missed the Zacks Consensus Estimate of $772.2 million but remained flat on a reported and underlying basis. During the quarter, the company’s broad-based growth across its geographies and brands portfolio was negated by impacts of tariffs and timing of customer orders.

On a geographic basis, in the fiscal first quarter, underlying sales growth was the strongest in the United States on continued double-digit growth from its premium bourbons, Woodford Reserve and Old Forester, and high single-digit underlying net sales growth in aggregate from tequilas, Herradura and el Jimador. Underlying sales grew 3% in emerging markets and 4% in the United States while it declined 3% in developed international markets. Soft results in the developed international markets were due to nearly an impact of six points from tariff-related buy-ins last year and net pricing reductions this year.

Growth across the company’s brand portfolio was led by Herradura, which reported 22% underlying sales growth in the fiscal first quarter. This was followed by 16% growth in underlying sales for the company’s premium bourbon brands, including Woodford Reserve and Old Forester. Meanwhile, el Jimador reported underlying sales growth of 10%. However, underlying net sales for the Jack Daniel’s family of brands declined 1% globally, driven by nearly three-percentage-point impact of tariff-related buy-ins and net pricing reductions. Moreover, underlying sales for Finlandia vodka dipped 5%.

Margins & Costs

In the fiscal first quarter, Brown-Forman’s gross profit declined nearly 5% to $498 million while gross margin contracted 330 basis points (bps) to 64.9%. On an underlying basis, gross profit declined 5%, mainly reflecting impacts of tariffs and higher input costs. Notably, tariff costs hurt gross margin by nearly 210 bps while the remaining decline was attributed to higher input costs, particularly agave and wood.

Selling, general and administrative (SG&A) expenses moved down 2% year over year to $164 million and 1% on an underlying basis. The decline in SG&A expenses can be attributed to lower compensation-related costs. Advertising expenses declined 6% year over year to $92 million and 4% on an underlying basis. This was driven by the timing of spending on tequila brands and the Jack Daniel’s family of brands, except for Jack Daniel’s Tennessee Whiskey. However, advertising costs were partly offset by increased media spending on Jack Daniel’s Tennessee Whiskey in the United States.

Operating income dropped 6% to $248 million and 8% on an underlying basis. Meanwhile, operating margin contracted 210 bps to 32.4% from 34.5% in the year-ago quarter.

Balance Sheet & Cash Flow

Brown-Forman ended first-quarter fiscal 2020 with cash and cash equivalents of $307 million, and long-term debt of $2,267 million. Its total shareholders’ equity was $1,663 million as of Jul 31, 2019. The company’s total debt of $2,487 million as of Jul 31, 2019, reflected a decline from $2,556 million at the end of fiscal 2018.

In first-quarter fiscal 2020, it generated $72 million in cash from operating activities.

On Jul 25, the company declared a quarterly cash dividend of 16.6 cents per share on Class A and Class B shares, reflecting an annualized dividend rate of 66.4 cents. The dividend is payable Oct 1, 2019, to shareholders of record as of Sep 6.

Fiscal 2020 Outlook

The company believes that fierce competition in developed economies as well as concerns related to the global economic and geopolitical environment may hurt near-term results. However, it reiterated its outlook for fiscal 2020.

For fiscal 2020, the company expects earnings per share of $1.75-$1.85, with underlying sales growth of 5-7%. Underlying operating income is anticipated to improve 3-5%.

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