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Brown-Forman B (BF.B) Down 7.1% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Brown-Forman B (BF.B). Shares have lost about 7.1% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Brown-Forman B 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 Earnings & Sales Top Estimates in Q1

Brown-Forman reported robust first-quarter fiscal 2023 results, wherein the top and bottom lines beat the Zacks Consensus Estimate. Sales and earnings rose year over year, backed by increased demand for its brands, mainly the resurgence of Jack Daniel’s Tennessee Whiskey, and growth across all geographic clusters.

For the fiscal first quarter, earnings per share of 52 cents advanced 30% year over year and surpassed the Zacks Consensus Estimate of 48 cents. The rise can be attributed to the top-line improvement and robust operating margin growth, which offset the higher costs, and gains from a lower effective tax rate.

Net sales of $1,007 million beat the Zacks Consensus Estimate of $983.9 million. The top line increased 11% year over year on a reported basis. On an organic basis, net sales were up 17% from the prior-year level. Sales benefited from an increase in distributor inventories. All of the company’s geographic clusters and Travel Retail have reported robust sales growth, driven by a robust volume.

For first-quarter fiscal 2023, Brown-Forman’s gross profit amounted to $626 million, improving 13% year over year. On an organic basis, gross profit rose 21%. The gross margin expanded 80 basis points (bps) to 61.8%. The increase was mainly attributed to a favorable price/mix, and the removal of the EU and the U.K. tariffs on American whiskey. This was partly offset by higher costs due to the ongoing supply-chain headwinds and input cost inflation, as well as adverse currency impacts.

Selling, general and administrative (SG&A) expenses rose 4% year over year and 7% on an organic basis, mainly on higher compensation-related expenses. Advertising expenses increased 23% for the fiscal first quarter. On an organic basis, advertising expenses advanced 28%, driven by elevated marketing spends in the United States to back growth of Jack Daniel’s Tennessee Whiskey, Herradura, the launch of the Jack Daniel’s Bonded series and Woodford Reserve.

Operating income improved 19% year over year to $343 million on a reported basis. Organic operating income increased 32%. The operating margin expanded 210 bps to 34% in the fiscal first quarter.

Category-Wise and Channel-Wise Performance

Net sales for the Jack Daniel’s family of brands were up 11% on a reported basis and 19% on an organic basis. The brand’s sales were driven by solid demand, and increased prices in emerging markets, developed international markets, and the Travel Retail channel. The upside was also driven by the resurgence of Jack Daniel’s Tennessee Whiskey, which has reported sales growth of 10% and organic growth of 21%. The estimated increase in distributor inventories also aided sales. Sales also benefited from the continued consumer interest in flavor, which boosted the performance of Jack Daniel’s Tennessee Honey, Jack Daniel’s RTDs, and Jack Daniel’s Tennessee Fire. Innovation contributed to sales growth through the launch of Jack Daniel’s Bonded series.

Premium bourbon brands have reported sales growth of 38% and organic sales growth of 39% in the fiscal first quarter, driven by growth in Woodford Reserve and Old Forester, supported by higher volume in the United States. An estimated rise in distributor inventories also boosted sales for Woodford Reserve and Old Forester.

The company’s Ready-to-Drink (RTD) category reported sales growth of 11% and organic sales growth of 19%. This growth was mainly driven by Jack Daniel’s RTDs and New Mix. Jack Daniel’s RTDs/Ready-to-Pours benefited from increased consumer preference for convenience, resulting in year-over-year sales growth of 12% and 17% on an organic basis, led by gains in Australia and Germany. New Mix reported sales growth of 44% and organic sales growth of 41%, driven by market share gains in the RTD category in Mexico.

Herradura witnessed a sales decline of 4% and an organic sales decline of 5%, owing to the cycling of significant growth in the prior-year period in the United States, as well as the impacts of supply-chain headwinds in the current fiscal quarter.

The company’s overall sales in the United States advanced 7% both on a reported and organic basis. The rise was driven by volume gains in Woodford Reserve, Jack Daniel’s Tennessee Honey, and Jack Daniel’s Tennessee Fire. This was partly negated by lower volumes for Jack Daniel’s Tennessee Whiskey and Korbel California Champagne.

Meanwhile, the developed international market reported sales growth of 9%, with organic sales rising 19%. The improvement was driven by the continued recovery in the on-trade channel, and the revival of travel and tourism. Volume gains from Jack Daniel’s Tennessee Whiskey and Jack Daniel’s RTDs mainly aided the results. The emerging markets registered 17% net sales growth, whereas organic sales improved 34%. This was backed by growth of Jack Daniel’s Tennessee Whiskey in Sub-Saharan Africa, Brazil, and Chile, as well as New Mix in Mexico.

Net sales in the Travel Retail channel advanced 77% on a reported basis and 85% on an organic basis on the back of higher volumes for the majority of the portfolio, as travel trends continued to rebound.

Balance Sheet & Cash Flow

The company ended first-quarter fiscal 2023 with cash and cash equivalents of $899 million, and long-term debt of $1,998 million. Its total shareholders’ equity was $2,807 million. As of Jul 31, 2022, BF.B generated $173 million in cash from operating activities.

Outlook

Despite the ongoing macroeconomic and geopolitical challenges, management anticipates continued growth for fiscal 2023. The company expects the strength in its brands and strong consumer demand to continue aiding the top line. It anticipates organic sales growth in the mid-single digits for fiscal 2023. The company expects a slight gross margin expansion for fiscal 2023, owing to the effects of inflation, and the removal of EU and UK tariffs on American whiskey.

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

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

At this time, Brown-Forman B has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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.

Outlook

Brown-Forman B has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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