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Strong Demand & Diversification to Support Brown-Forman (BF.B)

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Brown-Forman Corporation (BF.B) has retained its momentum amid the adversities affecting the industry, owing to its focus on maintaining brand strength across its portfolio. The company’s focus on investing in the diversification of its brand portfolio has been driving growth. Additionally, its commitment to cost-management efforts has boosted earnings growth.

Backed by these initiatives and solid demand for its brands across all regions, Brown-Forman reported strong fourth-quarter fiscal 2022 results, wherein the top and bottom lines beat the Zacks Consensus Estimate and increased year over year. This marked the company’s second straight earnings and sales beat. On an organic basis, net sales were up 27% in the quarter. Improved demand was particularly aided by the resurgence of Jack Daniel’s Tennessee Whiskey. Further, an increase in the operating margin despite higher costs boosted the bottom line.

Despite the ongoing supply-chain headwinds, Brown-Forman witnessed operating expense leverage in fourth-quarter fiscal 2022, owing to its focus on cost management. In fourth-quarter fiscal 2022, the company’s gross profit improved 26% year over year and the gross margin expanded 140 basis points (bps) to 62.8%.

Notably, selling, general and administrative (SG&A) expenses declined 8% year over year in the fiscal fourth quarter. Operating income improved 46% year over year on a reported basis and 62% on an organic basis. The operating margin expanded 400 bps to 24.7% in the fiscal fourth quarter.

The Zacks Rank # 3 (Hold) stock has risen 0.7% in the past three months against the industry’s decline of 6.6% and the Zacks Consumer Staples sector’s 0.5% fall. The stock also fared better than the S&P 500’s decline of 19%.

The Zacks Consensus Estimate for the company’s current financial year’s sales and earnings suggest growth of 7.2% and 14.4%, respectively, from the year-ago period’s reported number.

 

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Factors Aiding Performance

Brown-Forman's investments in brands center around broadening the Jack Daniel’s family of brands, while exiting the weaker brands and expanding the fast-growing premium spirits categories. For more than a decade, the Jack Daniel's Tennessee Whiskey has been the key contributor to growth in the United States.

Alongside this, the company has been investing in venues to organically accelerate the growth of its two fast-growing spirits categories, bourbon and tequila. The balanced portfolio investments are supporting the company’s record of consistent growth.

In fiscal 2022, net sales for the Jack Daniel’s family of brands were up 15% on a reported basis and 17% on an organic basis. The upside was mainly driven by the resurgence of Jack Daniel’s Tennessee Whiskey. The Jack Daniel’s Tennessee Whiskey reported sales growth of 20%, with 23% organic growth, mainly aided by volume growth and a favorable channel mix shift to the on-premise channel. Sales were also aided by the ongoing international launch of the Jack Daniel’s Tennessee Apple and robust consumer demand for Jack Daniel’s RTDs. However, supply-chain disruptions acted as deterrents.

Premium bourbon brands reported sales growth of 17% on both reported and organic basis in fiscal 2022, driven by growth in Woodford Reserve and Old Forester. The gains from Woodford Reserve were supported by higher volume and pricing in the United States, and an increase in volumes at Travel Retail. In the period, sales for Woodford Reserve slightly moderated due to the ongoing supply-chain headwinds. Old Forester continued to report double-digit net sales growth and surpassed 400,000 nine-liter cases in fiscal 2022.

Brown-Forman’s tequila brands witnessed 22% net sales growth on a reported basis and 20% on an organic basis. The category benefited from broad-based growth from Herradura and el Jimado, led by the United States.

Brown-Forman’s underlying sales for fiscal 2022 were aided by the company’s portfolio strength and growth across all geographic regions. The results benefited from strength in Jack Daniel’s Tennessee Whiskey and tequila categories, along with growth in the Travel Retail channel.

The company’s overall sales in the United States advanced 10% on a reported basis and 12% on an organic basis. The developed international market reported sales growth of 12%, with organic sales rising 16%. The emerging markets registered 24% net sales growth, while organic sales improved 29%. Net sales in the Travel Retail channel advanced 65% on a reported basis and 67% on an organic basis.

Robust View

Despite the ongoing macroeconomic and geopolitical challenges, Brown-Forman anticipates continued growth for fiscal 2023. BF.B 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 organic operating margin to increase in the mid-single digits. The effective tax rate is expected to be 22-23% for fiscal 2023.

Headwinds to Overcome

Despite cost-management initiatives, Brown-Forman continues to witness higher advertising expenses due to continued investments in its brands. In fourth-quarter fiscal 2022, advertising expenses increased 6% year over year. In fiscal 2022, advertising expenses rose 10% on a reported basis and 11% on an organic basis. The increase can be attributed to continued investments in its brands.

SG&A expenses increased 3% on a reported basis and 7% on an organic basis in fiscal 2022. The higher SG&A expenses stemmed from elevated discretionary spend and one-time items like a special employee bonus and costs related to the impacts of Russia’s invasion of Ukraine.

Looking for Better-Ranked Stocks? Check These

We have highlighted three better-ranked companies in the beverage industry, namely Archer Daniels Midland ADM, Fomento Economico Mexicano FMX and The Duckhorn Portfolio NAPA.

Archer Daniels, the Delaware, IL-based leading producer of food and beverage ingredients and goods made from various agricultural products, presently carries a Zacks Rank #2 (Buy). The ADM stock has declined 11.7% in the past three months.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Archer Daniels’ sales and EPS for the current financial year suggests growth of 12.3% and 22%, respectively, from the year-ago reported levels. The consensus mark for earnings has moved up 3.3% in the past 30 days. ADM has a trailing four-quarter earnings surprise of 22.3%, on average. It has an expected long-term earnings growth rate of 6.4%.

Fomento Economico Mexicano, alias FEMSA, has exposure in various industries, including beverage, beer and retail, which gives it an edge over its competitors. It presently has a Zacks Rank of 2. FEMSA has a trailing four-quarter earnings surprise of 3.9%, on average. Shares of FMX have declined 16.5% in the past three months.

The Zacks Consensus Estimate for FEMSA’s sales for the current financial year suggests growth of 7.2% from the year-ago period’s reported figure. The same for earnings per share suggests a fall of 5.6%. However, the current financial year’s earnings per share have moved up by a penny in the past 30 days. FMX has an expected EPS growth rate of 8.8% for three to five years.

Duckhorn Portfolio currently has a Zacks Rank #2. The company has an expected long-term earnings growth rate of 12.2%. Shares of NAPA have risen 8.1% in the past three months.

The Zacks Consensus Estimate for Duckhorn Portfolio's current financial year’s earnings per share has moved up 3.3% in the past 30 days. The Zacks Consensus Estimate for NAPA’s sales and EPS for the current financial year suggests growth of 10.8% and 6.9%, respectively, from the year-ago reported levels. NAPA has a trailing four-quarter earnings surprise of 94.4%, on average.


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