Brown-Forman (BF.B) Q1 Earnings Top On Strong Sales, Stock Up

Brown-Forman Corporation BF.B reported robust first-quarter fiscal 2018, wherein both earnings and sales topped estimates. In fact, the bottom-line results reflected a turnaround from the dismal earnings reported in the prior quarter.

Adjusted earnings of 46 cents jumped nearly 27% and surpassed the Zacks Consensus Estimate of 39 cents.

Net sales improved about 9% year over year to $723 million, after deducting excise taxes. However, on an underlying basis (excluding negative currency impact and other adjustments), sales increased 6% that marked the fourth straight quarterly growth. Moreover, the company’s sales, before accounting for excise taxes, came in at $929 million, up 8% from the prior-year figure of $856 million. The Zacks Consensus Estimate was pegged at $685.3 million.

The company’s robust underlying sales performance came on the back of strong portfolio of premium American whiskey brands, along with its Jack Daniel’s trademark. Further, net sales gained from solid growth rates in both developed and emerging markets. During the quarter, the impact of foreign currency on net sales growth was relatively lower.

Brown-Forman rose nearly 2.5% in the pre-market trading session following the earnings release. However, Brown-Forman shares have declined 1.4% in the last three months, underperforming the industry’s increase of 3.4%.

Quarter in Detail

Brown-Forman’s gross profit increased nearly 9% to $493 million, while gross margin contracted 30 basis points (bps) to 68.2%. However, underlying gross profit improved 6%.

Selling, general and administrative (SG&A) expenses dipped 1% from the year-ago quarter figure to $161 million, both on a reported and underlying basis. This was mainly driven by stringent cost controls.

However, advertising expenses rose 9% year over year to $89 million, while underlying advertising costs increased 6%. The rise in advertising costs is attributed to rise in investments for the Jack Daniels family of brands and further growth of the fast growing bourbon and tequila brands.

Nevertheless, operating income grew 14% to $244 million, with operating margin expanding 150 bps to 33.7%. On an underlying basis too, operating income of this Zacks Rank #3 (Hold) company increased 12%.

Balance Sheet & Cash Flow

Brown-Forman ended the quarter with cash and cash equivalents of $238 million, long-term debt of $1,720 million and total debt of $1,978 million. The company’s total shareholders’ equity was $1,420 million as of Jul 31, 2017.

In first-quarter fiscal 2018, the company generated $102 million cash from operating activities.

On Jul 27, 2017, the company declared a regular quarterly dividend of 18.25 cents per share on Class A and Class B shares. The dividend is payable on Oct 2, 2017, to shareholders on record as of Sep 7.

Fiscal 2018 Guidance

Going forward, the company expects the volatile global economic and geopolitical environment, particularly in the emerging markets as well as intensified competition in the developed economies to hinder results. However, the company remains confident of persistent growth in underlying net sales and operating income in fiscal 2018 and consequently reiterated guidance. Moreover, the company raised earnings per share projections for the fiscal.

Management continues to project 4-5% growth in underlying sales mainly backed by growth of its premium American whiskey and tequila brands, comprising innovation for Jack Daniel’s RTDs. Further, growth is likely to come from new product launches including the Jack Daniel's Tennessee Rye and Slane Irish Whiskey.

The company expects SG&A expense on an underlying basis to remain flat, driven by smooth execution of cost-control initiatives.

Underlying operating income is anticipated to increase in range of 6-8%. Further, the company now estimates earnings per share in the range of $1.85-$1.95, compared with the previous guidance of $1.80-$1.90. The company’s revised earnings forecast assumes a tax rate of nearly 28% and gains from the recently reversed impact of foreign currency. For fiscal 2018, the company anticipates slight foreign currency tailwinds to benefit results.

Stocks to Consider

Some better-ranked stocks in the same industry include The Boston Beer Co. Inc. (NYSE:SAM) , Craft Brew Alliance, Inc. (NASDAQ:BREW) , each sporting a Zacks Rank #1 (Strong Buy), and Constellation Brands Inc. (NYSE:STZ) with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boston Beer has jumped nearly 5.7% in the last three months. Moreover, the company’s estimates for the current fiscal have witnessed uptrend in the last 30 days.

Craft Brew Alliance has surged 6.9% in the last three months. Also, the company has delivered an average positive earnings surprise of 222.8% in the trailing four quarters. Further, estimates for the current fiscal have witnessed positive estimate revisions in the last 30 days.

Constellation Brands has gained nearly 29.4% year to date. Moreover, it has a long-term earnings growth rate of 18.2%.

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