Brown-Forman (BF.B) Up 22% In 6 Months: What's Driving It?

Brown-Forman Corporation BF.B is gaining from robust momentum in premium bourbons and tequilas. The company is focused on investing in the diversification of brand portfolio to drive growth. Notably, Jack Daniel's Tennessee Whiskey has been the key contributor of growth in the United States for more than a decade. Moreover, the company is confident of capitalizing on the American Whiskey strategy, with continued benefits from investments in the brand portfolio.

In the past six months, shares of this Zacks Rank #3 (Hold) company have increased around 22% against the industry’s decline of 2.2%.

Factors Narrating Brown-Forman’s Growth Story

Brown-Forman’s strong portfolio of globally-recognized brands, including the Jack Daniels family of brands, positions it well in the alcohol beverage space. It currently owns and produces a multitude of popular spirit brands, including Jack Daniels, Southern (NYSE:SO) Comfort and Finlandia Vodka. We expect the company’s continued focus on pricing, product innovation and expanding operations in emerging markets to boost operational performance and further strengthen market position.




In fact, broad-based growth across Brown-Forman’s brand portfolio and geographies is primarily aiding its results. The company’s underlying sales growth in first-half fiscal 2020 reflects notable strength in the United States, its largest market. Results in the United States were aided by premium bourbons and tequilas. Notably, underlying net sales grew 6% in the United States, 2% in developed international markets and 5% in emerging markets.

For fiscal 2020, the company expects earnings per share of $1.75-$1.85, with underlying sales growth of 5-7%.

Also, the company is investing in brand portfolio, which has been aiding its performance. Its investments in brands are centered on the broadening of Jack Daniel’s family of brands, while exiting weaker brands and expanding the fast-growing premium spirit categories. Further, it is increasingly investing to organically accelerate growth of two fast-growing spirits categories, namely bourbons and tequilas. These balanced portfolio investments are supporting the company’s track record of attaining consistent growth.

Possible Deterrents

Brown-Forman has been witnessing headwinds related to tariffs imposed on American spirits, which have been hurting underlying sales as well as margins. Notably, underlying sales in the first half of fiscal 2019 and 2020 were hurt by tariff-related buy-ins, which occurred in first-quarter fiscal 2019.

Further, underlying sales for the company’s Jack Daniel’s family of brands included negative impacts of last year’s tariff-related buy-ins and related net pricing reductions. In addition to the buying effects, the cost of tariffs has been reducing margins, attributed to lower pricing in certain markets wherein it sells products to distributors and higher cost in markets wherein it imports and distributes products directly.

In the first half of fiscal 2020, gross margin declined 270 basis points, resulting in an underlying gross profit drop of 2% from the corresponding period of last year. Gross margin decline was mainly due to tariff-related expenses and higher input costs reflecting agave and wood inflation. Further, underlying operating income declined 5% in the first half, including a 6-percentage point negative impact from tariff-related costs.

Moreover, the company lowered its underlying operating income view for fiscal 2020, based on uncertain economic and geopolitical environments in certain emerging markets, the Travel Retail channel, as well as higher input costs. The company lowered its underlying operating income growth projection 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.

Nevertheless, we expect all aforementioned growth drivers to offset these hurdles and help Brown-Forman to sustain momentum.

Key Picks

The Boston Beer Company, Inc. (NYSE:SAM) has a long-term earnings growth rate of 11%. 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 (NASDAQ:MNST) has a long-term earnings growth rate of 13.5% and a Zacks Rank #2 (Buy).

The Coca-Cola Company (NYSE:KO) has a long-term earnings growth rate of 7.2% and a Zacks Rank #2.

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