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Brown-Forman (BF.B) Q3 Earnings Miss, Sales Top Estimates

Brown-Forman Corporation (BF.B) has reported third-quarter fiscal 2023 results, wherein earnings missed the Zacks Consensus Estimate and our estimate. Meanwhile, sales beat the consensus mark and our estimate. Sales also improved year over year, backed by the increased demand for its brands, mainly the Jack Daniel’s Tennessee Whiskey, and growth across all geographic clusters. Earnings were affected by soft operating income in the quarter.

In the fiscal third quarter, earnings per share (EPS) of 21 cents declined 61% year over year and lagged the Zacks Consensus Estimate of 47 cents and our estimate of 45 cents. The decline can be attributed to lower operating income and a $27-million pension settlement charge.

Net sales of $1,081 million beat the Zacks Consensus Estimate of $1,015 million and our estimate of 989.6 million. The top line increased 4% year over year on a reported basis. On an organic basis, net sales were up 5% from the prior-year level. Sales benefited from strong consumer demand for its brands and sustained brand investments. BF.B is benefiting from recent acquisitions, portfolio premiumization, product innovation and strategic relationships.

Brown-Forman Corporation Price, Consensus and EPS Surprise

 

Brown-Forman Corporation Price, Consensus and EPS Surprise
Brown-Forman Corporation Price, Consensus and EPS Surprise

Brown-Forman Corporation price-consensus-eps-surprise-chart | Brown-Forman Corporation Quote

In the third quarter of fiscal 2023, Brown-Forman’s gross profit amounted to $624 million, almost flat with the prior-year quarter. On an organic basis, the gross profit rose 2%. Meanwhile, the gross margin contracted 230 basis points (bps) to 57.7%. The gross margin decline can be attributed to the impacts of input cost inflation, elevated costs, resulting from supply-chain disruptions, and adverse currency rates. These were partly negated by a favorable price/mix and the removal of the EU and the U.K. tariffs on American whiskey.

SG&A expenses of $186 million rose 14% year over year and on an organic basis mainly on higher compensation-related expenses, rising discretionary spending and the acquisition, and integration costs for the Gin Mare and Diplomatico brands.

Advertising expenses increased 21% year over year to $141 million for the fiscal third quarter. On an organic basis, advertising expenses advanced 23%. This was driven by elevated marketing spends in the United States to back growth of Jack Daniel’s Tennessee Whiskey, Herradura, Woodford Reserve and the launch of the Jack Daniel’s Bonded series.

The operating income declined 50% year over year to $173 million on a reported basis. The organic operating income declined 11%. The operating margin of 15.9% contracted significantly from the 33.5% reported in the year-ago quarter.

The Zacks Rank #2 (Buy) company’s shares have risen 3.1% in the past year compared with the industry’s growth of 0.2%.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

 

Category-Wise & Channel-Wise Performance

In the first nine months of fiscal 2023, net sales increased 8% year over year to $3.2 billion and 12% on an organic basis. The rise was mainly driven by broad-based growth across all geographic regions, and the Travel Retail channel on strong consumer demand and the rebuilding of distributor inventories.

Net sales for Jack Daniel’s family of brands were up 5% on a reported basis and 11% on an organic basis in the first nine months of fiscal 2023. The brand’s sales were driven by solid demand, higher pricing and the estimated increase in distributor inventories. The upside in sales was also driven by the strength in Jack Daniel’s Tennessee Whiskey in international markets and the Travel Retail channel. Jack Daniel’s Tennessee Whiskey reported sales growth of 6% and organic growth of 12%.

Further, sales benefited from the continued consumer interest in flavor and convenience, which boosted the performance of Jack Daniel’s Ready-to-Drink (RTD), Jack Daniel’s Tennessee Honey and Jack Daniel’s Tennessee Fire. Innovation contributed to sales growth through the launch of Jack Daniel’s Bonded series.

Premium bourbon brands reported sales growth of 33% and organic sales growth of 34% in the first nine months of fiscal 2023, driven by double-digit growth in Woodford Reserve and Old Forester. An estimated rise in distributor inventories due to the easing of glass supply constraints also boosted sales for Woodford Reserve and Old Forester.

BF.B’s RTD category reported double-digit sales growth of 12% and organic sales growth of 15%. This was mainly driven by Jack Daniel’s RTDs and New Mix. RTD’s growth can be attributed to the consumer preference for convenience and flavor. Jack Daniel’s RTDs/Ready-to-Pours benefited from gains in Australia and Germany, resulting in year-over-year sales growth of 6% and 10% on an organic basis. New Mix reported sales growth of 45% and organic sales growth of 41%, driven by market share gains in Mexico, as well as higher volumes and prices.

Brown-Forman’s tequila portfolio reported sales growth of 12% year over year and 11% on an organic basis. This was driven by double-digit sales growth for the el Jimador and Herradura brands. Sales increased 10% on a reported and 9% on an organic basis for the Herradura brand due to volume gains in the United States, offset by higher distributor inventories and higher pricing in Mexico. el Jimador reported year-over-year sales growth of 18% and 19% on an organic basis, driven by growth in Mexico and the United States.

The company’s overall sales in the United States advanced 4% on a reported and organic basis. The rise was driven by volume gains for Woodford Reserve, owing to the rise in distributor inventories, and higher pricing across the Jack Daniel’s portfolio. These were partly negated by lower volumes of Jack Daniel’s Tennessee Whiskey and Korbel California Champagne.

Meanwhile, the developed international market reported sales growth of 5%, with organic sales rising 13%. The improvement can be attributed to volume gains for the Jack Daniel’s Tennessee Whiskey and Jack Daniel’s RTDs. Additionally, higher pricing for Jack Daniel’s Tennessee Whiskey has aided the results.

The emerging markets registered 18% net sales growth, whereas organic sales improved 26%. This was backed by growth of Jack Daniel’s Tennessee Whiskey in the United Arab Emirates and Brazil, as well as continued double-digit growth of New Mix in Mexico.

Net sales in the Travel Retail channel advanced 48% on a reported basis and 52% on an organic basis due to higher volumes for the majority of the portfolio as travel trends continued to rebound.

Balance Sheet & Cash Flow

The company ended the first nine months of fiscal 2023, with cash and cash equivalents of $428 million, and long-term debt of $2,024 million. Its total shareholders’ equity was $3,038 million. As of Jan 31, 2023, BF.B used about $1,300 million of cash for operating activities.

Outlook

Despite the ongoing macroeconomic and geopolitical challenges, management anticipates continued growth for fiscal 2023. Brown-Forman expects strength in its brand portfolio and strong consumer demand and the return of inventories to more normalized levels to aid organic sales growth in fiscal 2023.

It anticipates organic sales growth of 8-10% for fiscal 2023 compared with high-single-digit growth expected earlier. The company expects the gross margin for fiscal 2023 to be consistent with the first half of fiscal 2023, wherein it reported a decline due to inflation, supply-chain disruption costs and currency headwinds.

Based on the aforementioned assumptions, Brown-Forman expects the organic operating income to increase in the high-single digits. The effective tax rate is expected to be 22-23% for fiscal 2023. Capital expenditure is anticipated to be $190-$210 million.

Other Stocks to Consider

We have highlighted three other top-ranked stocks from the Consumer Staples sector, namely Coca-Cola FEMSA KOF, Anheuser-Busch InBev BUD and Fomento Economico Mexicano FMX.

Coca-Cola FEMSA produces, markets and distributes soft drinks throughout the metropolitan area of Mexico City in Southeastern Mexico and the metropolitan region in Buenos Aires, Argentina. KOF has a trailing four-quarter earnings surprise of 36.5%, on average. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Shares of Coca-Cola FEMSA have rallied 44.9% in the past year. The Zacks Consensus Estimate for Coca-Cola FEMSA’s current financial-year sales and earnings suggests growth of 3.8% and 6%, respectively, from the year-ago period's reported figures. KOF has an expected EPS growth rate of 12% for three to five years.

Anheuser-Busch InBev, alias AB InBev, is a global brewing company with more than 500 iconic brands. It currently has a Zacks Rank #2. The company has an expected EPS growth rate of 9.7% for three to five years. Shares of BUD have gained 4.5% in the past year.

The Zacks Consensus Estimate for AB InBev’s current financial-year sales and earnings per share suggests growth of 7% and 1.3%, respectively, from the year-ago period’s reported figures. BUD has a trailing four-quarter earnings surprise of 13.6%, on average.

Fomento Economico Mexicano, alias FEMSA, has exposure in various industries, including beverage, beer and retail, which gives it an edge over its competitors. FMX currently has a Zacks Rank #2. FEMSA has a trailing four-quarter negative earnings surprise of 21.7%, on average. Shares of FEMSA have risen 15.9% in the past year.

The Zacks Consensus Estimate for FEMSA’s current financial-year sales and earnings suggests growth of 4.3% and 28.2%, respectively, from the year-ago period’s reported figures.

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Fomento Economico Mexicano S.A.B. de C.V. (FMX) : Free Stock Analysis Report

Anheuser-Busch InBev SA/NV (BUD) : Free Stock Analysis Report

Coca Cola Femsa S.A.B. de C.V. (KOF) : Free Stock Analysis Report

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