Brown-Forman (BF.B) Beats Q4 Earnings, Sales Estimates

Brown-Forman Corporation BF.B delivered fourth-quarter fiscal 2018 results, wherein both earnings and sales topped estimates. This marked the company’s fourth straight quarter of earnings and sales beat. Adjusted earnings of 23 cents declined 24% but surpassed the Zacks Consensus Estimate of 22 cents. Earnings were hurt by the previously announced creation of a $70 million charitable foundation as well as phasing of operating expenses.

Net sales improved about 6% year over year to $733 million, after deducting excise taxes. However, on an underlying basis (excluding negative currency impact and other adjustments), sales increased 5%, marking the seventh straight quarterly growth. The Zacks Consensus Estimate was pegged at $747.4 million.

Brown-Forman Corporation Price, Consensus and EPS Surprise

Brown-Forman Corporation Price, Consensus and EPS Surprise | Brown-Forman Corporation Quote

The company’s robust underlying sales performance can be attributed to the persistent momentum in its focus categories and strength in Jack Daniels, led by premium American whiskey portfolio. Further, net sales gained from balanced growth across geographies and the company’s portfolio.

The fourth-quarter fiscal 2018 results had a slightly-negative implication on Brown-Forman shares. However, this Zacks Rank #3 (Hold) company’s shares have gained 5.6% in the last three months, against the industry’s decline of 9.3%.

Quarter in Detail

Brown-Forman’s gross profit increased nearly 7% to $512 million while gross margin expanded 60 basis points (bps) to 69.8%.

Selling, general and administrative (SG&A) expenses increased about 50% year over year to $268 million while increasing 9% on an underlying basis. The significant rise in SG&A expenses in the reported quarter can be attributed to the negative impact from one-time items, including special employee bonuses and $70 million related to the creation of the charitable foundation. Additionally, advertising expenses rose 10% year over year to $100 million.

Driven by higher expenses, operating income declined 32% to $145 million, with operating margin contracting 360 bps to 19.8%. On an underlying basis, operating income of the company declined 4%.

Balance Sheet & Cash Flow

Brown-Forman ended fiscal 2018 with cash and cash equivalents of $239 million and long-term debt of $2,341 million. The company’s total shareholders’ equity was $1,316 million as of Apr 30, 2018.

In fiscal 2018, the company used $128 million cash from operating activities.

On Jan 23, the company declared a five-for-four stock split, which was paid on Feb 28, 2018. In connection with the stock split, the company also announced a special dividend of $1.00 on split adjusted Class A and Class B stock. This dividend was paid on Apr 23, to shareholders with record as of Apr 2.

Further, on May 24, the company declared a quarterly cash dividend of 15.8 cents per share on a split-adjusted Class A and Class B shares.

Fiscal 2019 Outlook

The company believes that the global economic environment has improved modestly in the past year, with favorable conditions in many emerging markets. However, it notes that competition has intensified in the developed economies, alongside rising concerns on potential retaliatory tariffs on American spirits.

Nonetheless, the company is confident of capitalizing on its American Whiskey strategy while benefiting from investments in its brands’ portfolio over the years. Consequently, the company expects to deliver yet another strong year, with solid earnings gains in fiscal 2019 backed by strength in its business and gains from the tax reform.

In fiscal 2019, the company estimates earnings per share of $1.75-$1.85 per share, reflecting 18-25% increase. This includes the tax rate of 21% and 5 cents negative impact from higher interest expense, foreign exchange and expected changes in inventories.

Moreover, the company projects underlying sales growth of 6-7%. In fiscal 2019, the company expects underlying SG&A expenses to be flat while underlying A&P is expected to increase in line with underlying sales growth. Additionally, underlying operating income is anticipated to increase 7-9%.

Stocks to Consider

Some better-ranked stocks in the Beverages-Alcohol industry include Kirin Holdings Co. KNBWY and The Boston Beer Company Inc. SAM, both sporting a Zacks Rank #1 (Strong Buy), while Craft Brew Alliance, Inc. BREW carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kirin Holdings has jumped nearly 7.6% in the last three months. Further, the company has long-term earnings growth rate of 10%.

Boston Beer has gained nearly 52.7% in the last three months. Moreover, it has long-term earnings growth rate of 9.5%.

Craft Brew Alliance has surged 16.4% in the past year. Further, the company has delivered a positive earnings surprise of 246.7% in the trailing four quarters.

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