Brown-Forman Corporation (BF.B) reported mixed third-quarter fiscal 2024 results. The company’s earnings beat the Zacks Consensus Estimate and improved year over year. Meanwhile, sales missed the Zacks Consensus Estimate and declined year over year.
In the fiscal third quarter, earnings per share (EPS) of 60 cents rose 186% year over year and beat the Zacks Consensus Estimate of 56 cents.
Net sales of $1.069 billion missed the Zacks Consensus Estimate of $1.126 billion. The top line declined 1% year over year on a reported basis. On an organic basis, net sales were down 2% from the prior-year level.
Shares of Brown-Forman lost 4.9% in the pre-market trading session on Mar 6, owing to the soft top-line performance and a lowered view for fiscal 2024. The Zacks Rank #4 (Sell) company’s shares have gained 11.5% in the past three months compared with the industry’s growth of 0.2%.
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Q3 in Detail
In third-quarter fiscal 2024, Brown-Forman’s gross profit of $635 million increased 2% year over year on both reported basis and 5% on an organic basis. The gross margin expanded 170 basis points to 59.4%. The gross margin was aided by an improved price/mix and reduced supply-chain disruption costs. This was partly negated by higher input costs, adverse currency rates and negative impact of acquisitions and divestitures.
SG&A expenses of $203 million rose 9% year over year and 7% on an organic basis. The increase stemmed from higher compensation and benefit-related expenses. Advertising expenses increased 1% year over year to $143 million for the fiscal third quarter. On an organic basis, advertising expenses declined 1%. Elevated advertising costs mainly resulted from the launch of Jack Daniel’s and Coca-Cola RTDs, increased investments in Jack Daniel’s Tennessee Whiskey, and the acquisition of Gin Mare and Diplomatico.
We expected advertising expenses to increase 0.7% year over year to $142 million in the fiscal third quarter and selling, general and administrative expenses to increase 5.1% year over year to $195.4 million.
Operating income improved 116% year over year to $373 million on a reported basis due to the positive effect of acquisitions and divestitures, an improved gross margin and the absence of the Finlandia non-cash impairment compared with the prior-year period. This was partly offset by operating expense growth and adverse currency rates. The organic operating income rose 5%. The operating margin of 34.9% expanded significantly from 15.9% reported in the year-ago quarter.
Our model predicted an operating margin of 31.3%, which indicates a substantial growth from 16% in the year-ago quarter.
Brown-Forman Corporation Price, Consensus and EPS Surprise
Brown-Forman Corporation Price, Consensus and EPS Surprise
In the first nine months of fiscal 2024, net sales rose 1% on a reported basis and were flat on an organic basis. The improvement was mainly driven by growth in emerging and the Travel Retail channel. However, sales growth was partly negated by declines in the United States and developed international markets.
The emerging markets registered 9% net sales growth and 11% organic sales growth. This was backed by the strong growth of New Mix in Mexico and Jack Daniel’s Tennessee Apple in Brazil and Chile.
Net sales in the Travel Retail channel advanced 3% on a reported basis and 1% on an organic basis. The increase was the result of gains in the super-premium American whiskey portfolio, led by growth in Woodford Reserve and Jack Daniel’s Single Barrel, as well as the launch of Jack Daniel’s American Single Malt. This was partly negated by soft volume in Jack Daniel’s Tennessee Whiskey and Jack Daniel’s Tennessee Honey.
The company’s overall sales in the United States declined 1% on a reported basis and 2% on an organic basis. The decline resulted from lower volumes due to a net decrease in distributor inventories, offset by increased prices across the portfolio, led by Jack Daniel’s Tennessee Whiskey and el Jimador, the acquisition of Diplomático and growth of super-premium Jack Daniel's expressions.
Sales for the developed international market declined 2% on a reported basis and 6% on an organic basis. The decline stemmed from lower volumes of Jack Daniel’s Tennessee Whiskey in Japan. This was slightly offset by sales growth for the recently acquired Gin Mare and Diplomático brands and the launch of Jack Daniel’s Tennessee Apple in South Korea.
Category-Wise Performance
In the first nine months of fiscal 2024, the company’s newly acquired Gin Mare and Diplomático drove most of the sales growth. This led to significant growth in the rest of the portfolio, with reported sales growth of 79% and organic sales growth of 11%. The growth was driven by gains in the developed international markets and the United States.
The company continued to witness growth in the ready-to-drink (RTD) category, owing to consumer preference for convenience and flavor. Sales for New Mix improved 34% on a reported basis and 17% on an organic basis, driven by higher prices and positive currency effects. Jack Daniel’s RTDs/Ready-to-Pours reported sales growth of 1% each on a reported and organic basis, driven by the launch of the Jack Daniel’s & Coca-Cola RTD, partly offset by lower volumes of Jack Daniel’s & Cola due to the transition.
Net sales for whiskey products declined 2% year over year and 1% on an organic basis. The dip was led by declines in Jack Daniel’s Tennessee Whiskey and Jack Daniel’s Tennessee Honey, offset by growth of Jack Daniel’s Tennessee Apple and the rest of the whiskey portfolio, including Jack Daniel’s super-premium expressions, Glenglassaugh old and rare cask sales, and Woodford Reserve.
Brown-Forman’s reported sales for the tequila portfolio were flat year over year, with a 3% decline on an organic basis. Sales growth for the el Jimador brand was offset by a decrease in the Herradura brand. The el Jimador reported year-over-year sales growth of 5% on a reported basis and 4% on an organic basis, driven by higher pricing, mainly in the United States. Sales declined 7% on a reported and 10% on an organic basis for the Herradura brand, driven by lower volumes in the United States, offset by positive currency effects.
Balance Sheet & Cash Flow
The company ended its third-quarter fiscal 2024 with cash and cash equivalents of $589 million and long-term debt of $2,678 million. Its total shareholders’ equity was $3,245 million. As of Jan 31, 2024, BF.B had $63 million in cash from operating activities.
In the first nine months of fiscal 2024, the company returned nearly $300 million to stockholders via dividends. It recently announced a quarterly dividend of 21.78 cents per share on its Class A and Class B shares. The dividend is payable on Apr 1, 2024, to shareholders of record as of Mar 8. It has paid out regular quarterly dividends for 80 consecutive years and raised the dividend for 40 consecutive years.
Outlook
Driven by the persistent challenging operating environment, management lowered its view for fiscal 2024. It anticipates organic sales for fiscal 2024 to be flat year over year compared with growth of 3-5%, as stated earlier. The dismal sales view is mainly the result of slower-than-expected sales growth in the first nine months of fiscal 2024.
Brown-Forman expects the organic operating income to be between flat to up 2%, mainly based on its revised expectations for organic sales and improved gross margin. Earlier, the company predicted an increase of 4-6% in organic operating income. The effective tax rate is expected to be 20-22% for fiscal 2024. Capital expenditure is anticipated to be $230-$240 million.
Stocks to Consider
We have highlighted three better-ranked stocks from the Consumer Staples sector, namely Molson Coors TAP, Post Holdings POST and Coca-Cola FEMSA KOF.
Molson Coors, a global manufacturer and seller of beer and other beverage products, currently sports a Zacks Rank #1 (Strong Buy). Shares of TAP have risen 1.4% in the past three months. You can see the complete list of today's Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Molson Coors’ current financial-year sales and earnings per share suggests growth of 1.3% and 4.2%, respectively, from the year-ago period’s reported figures. TAP has a trailing four-quarter earnings surprise of 37.2%, on average.
Post Holdings, a consumer-packaged goods holding company, has a trailing four-quarter earnings surprise of 52.2%, on average. It currently carries a Zacks Rank #1.
The Zacks Consensus Estimate for Post Holdings’ current financial-year sales and earnings suggests growth of 15.2% and 3.4%, respectively, from the year-ago period's reported figure. Shares of POST have rallied 17.2% in the past three months.
Coca-Cola FEMSA is the world’s largest franchise bottler for Coca-Cola products. It currently carries a Zacks Rank #2 (Buy). KOF shares have rallied 10.5% in the past three months.
The Zacks Consensus Estimate for KOF’s current financial-year sales and earnings suggests growth of 10.1% and 24.4%, respectively, from the year-ago period's reported figures. KOF has a trailing four-quarter negative earnings surprise of 2.1%, on average.
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