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It has been about a month since the last earnings report for BrownForman Corporation (BF.B). Shares have lost about 4.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is BrownForman Corporation due for a breakout? 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 Q1 Earnings & Sales Top Estimates
Brown-Forman reported first-quarter fiscal 2021 results, wherein earnings and sales beat the Zacks Consensus Estimate. Moreover, earnings improved significantly year over year driven by strong volume performance as well as cost discipline. Meanwhile, the impact of the coronavirus outbreak on the on-premise channel continued to mar the top line.
Given the unpredictable nature of the crisis, the company did not provide any guidance for fiscal 2021.
Brown-Forman’s earnings per share of 67 cents improved 73% year over year and surpassed the Zacks Consensus Estimate of 31 cents.
Net sales of $753 million beat the Zacks Consensus Estimate of $694.1 million but declined 2% on a reported basis. On an underlying basis, net sales rose 3% on strong volume growth, offset by a decline in price/mix.
The company reported volume growth of 22% in the fiscal first quarter, aided by New Mix, the Jack Daniel’s family of brands, and Woodford Reserve. Price/mix dropped 19% due to unfavorable portfolio mix, with gains from lower-priced brands (like New Mix & Jack Daniel’s RTDs) and the unfavorable channel mix stemming from the pandemic-led restrictions on the on-premise channel.
In the fiscal first quarter, underlying sales were driven by gains in the United States and developed international markets despite the pandemic-related disruptions. On a geographic basis, underlying sales growth was the strongest in developed international markets, growing 12%. Meanwhile, underlying net sales in the United States, the company’s largest market, were up 9%. However, emerging markets reported a 3% decline in underlying sales. 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, and Jack Daniel’s Tennessee Honey.
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 Apple and Jack Daniel’s Tennessee Honey. Additionally, it witnessed strong gains in underlying net sales in aggregate for premium bourbons, including Woodford Reserve and Old Forester.
However, declines in emerging markets were led by Russia, Southeast Asia, sub-Saharan Africa, and India, owing to the pandemic-related disruptions. This was partly offset by gains in Mexico, Brazil and Poland.
Growth across the company’s brand portfolio was led by premium bourbon brands, including Woodford Reserve and Old Forester, which reported 18% growth in underlying net sales in the fiscal first quarter. This growth was led by a 14% rise in underlying sales for Woodford Reserve along with sustained high double-digit underlying growth from Old Forester.
Meanwhile, its tequila brands reported a 16% rise in underlying sales growth globally, driven by robust volume-led underlying net sales growth from New Mix in Mexico and double-digit underlying net sales growth from el Jimador. Underlying sales were partly by a 16% underlying sales decline at Herradura brand. Further, underlying net sales for the Jack Daniel’s family of brands were up 3% globally as gains from Jack Daniel’s RTDs, Jack Daniel’s Tennessee Apple, Jack Daniel’s Tennessee Honey and Gentleman Jack were offset by unfavorable channel mix shift in Jack Daniel’s Tennessee Whiskey.
However, underlying sales for the company’s non-branded business, comprising used barrels, bulk whiskey and contract bottling, declined 32% on lower used barrel demand and pricing.
Margins & Costs
In the fiscal first quarter, Brown-Forman’s gross profit declined 7% to $465 million, while gross margin contracted 320 basis points (bps) to 61.7%. On an underlying basis, gross profit declined 1%. The decline in gross margin can be attributed to higher input costs and unfavorable mix on coronavirus outbreak-related closures in the on-premise channel as well as the significant rise in sales of ready-to-drink products.
Selling, general and administrative (SG&A) expenses declined 10% year over year, on both reported and underlying basis, to $148 million. SG&A expenses reduced due to lower discretionary spending owing to its focus on cost management. Advertising expenses of $62 million declined 33% on a reported basis and 17% on an 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.
Operating income rose 56% to $387 million on a reported basis and 15% on an underlying basis. This was primarily due to strong operating expanse leverage. Meanwhile, operating margin expanded substantially to 51.4% from 31.4% in the year-ago quarter.
Balance Sheet & Cash Flow
Brown-Forman ended first-quarter fiscal 2021 with cash and cash equivalents of $908 million, and long-term debt of $2,316 million. Its total shareholders’ equity was $2,150 million as of Jul 31, 2020. In first-quarter fiscal 2021, it generated $91 million in cash from operating activities.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
At this time, BrownForman Corporation has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. 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 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 has been net zero. Notably, BrownForman Corporation has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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