It has been about a month since the last earnings report for Brown-Forman B (BF.B Quick QuoteBF.B - Free Report) . Shares have lost about 2.2% in that time frame, underperforming 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 Q4 Earnings Miss, Sales Beat

Brown-Forman reported fourth-quarter fiscal 2021 results, wherein earnings missed the Zacks Consensus Estimate and declined year over year. However, sales beat the consensus mark and improved year over year.

Earnings per share of 25 cents declined 6% year over year and missed the Zacks Consensus Estimate of 30 cents. Lower-than-expected earnings can be attributed to higher costs and margins, which offset top-line growth. In fiscal 2021, earnings per share improved 9% year over year to $1.88, including a gain of 20 cents on the sale of Early Times, Canadian Mist and Collingwood brands.

Net sales of $812 million beat the Zacks Consensus Estimate of $788.8 million and improved 14% year over year on a reported basis. On an underlying basis, net sales were up 19% from the prior-year quarter. In fiscal 2021, reported sales were up 3%, while underlying sales improved 6%. The top line benefited from strong volume growth, offset by a decline in price/mix.

The company reported volume growth of 12% in fiscal 2021, aided by new flavors introduced for Ready-to-Drink (RTDs) and Jack Daniel’s. Price/mix dropped 6% due to unfavorable portfolio mix shift toward lower-priced brands (like New Mix and Jack Daniel’s RTDs) and the unfavorable channel mix due to the pandemic-led restrictions on the on-premise channel across several developed markets globally.

Moreover, the company remains optimistic about the fiscal 2022 top and bottom lines as the operating environment continues to improve. It expects to benefit from the strength of its markets and the reopening of the on-premise channel and pick-up in tourism. Also, it anticipates capitalizing on the ongoing spirits premiumization trend. Consequently, it anticipates underlying sales and operating income growth in mid-single-digits for fiscal 2022.

Deeper Insight

In fiscal 2021, underlying sales growth was driven by gains across each of the three major International Monetary Fund geographic clusters (the United States, developed international and emerging markets), partly offset by declines in Travel Retail and used barrels. On a geographic basis, underlying sales improved 10% each in the United States and the developed international markets, while it registered growth of 6% in the emerging markets.

Growth in the United States, the company’s largest market, was driven by strong demand for premium bourbons and Jack Daniel’s RTDs. Additionally, the company benefited from higher volume and prices for tequilas, Herradura and el Jimador. Meanwhile, gains in the developed international markets were led by strong growth in Australia, Germany, France, and the U.K. This was partly negated by declines in the on-premise focused markets as well as those dependent on tourism, including Spain and Czechia.

Underlying sales in the emerging markets were propelled by volume Brazil, Mexico, China and Poland. However, reduced tourism and trading down to lower-priced brands in some markets offset sales growth. Further, the company’s Travel Retail business continued to be impacted by the pandemic-led travel bans and restrictions.

Growth across its brand portfolio was led by premium bourbon brands, including Woodford Reserve and Old Forester, which reported 23% growth in underlying net sales in fiscal 2021. The rise was led by double-digit growth in underlying sales for Woodford Reserve and Old Forester.

Meanwhile, the company’s tequila brands reported 14% underlying sales growth globally, driven by robust volume-led underlying net sales growth from New Mix in Mexico. Further, a double-digit increase in underlying net sales for el Jimador and Herradura in the United States was offset by lower volumes for the brands in Mexico.

Underlying net sales for the Jack Daniel’s family of brands were up 4% globally, driven by Jack Daniel’s RTDs, the international launch of Jack Daniel’s Tennessee Apple, and volume-driven growth from Jack Daniel’s Tennessee Honey and Gentleman Jack. These were offset by a decline in underlying sales for Jack Daniel’s Tennessee Whiskey.

Margins & Costs

In fourth-quarter fiscal 2021, Brown-Forman’s gross profit increased 10% year over year on a reported basis and 17% on an underlying basis to $498 million. Meanwhile, the reported gross margin contracted 260 basis points (bps) to 61.3%. In fiscal 2021, gross profit declined 2% on a reported basis and rose 3% on an underlying basis. The reported gross margin for the fiscal declined 270 bps to 60.5%.

The decline in gross margin can be attributed to higher input costs, lower fixed costs absorption, and unfavorable impacts of the portfolio mix shift to lower-priced brands. The portfolio mix shift is attributed to the significant rise in sales of ready-to-drink products.

Selling, general and administrative (SG&A) expenses increased 26% year over year to $211 million on a reported basis in the fiscal fourth quarter. On an underlying basis, SG&A expenses were up 11% year over year. In fiscal 2021, reported SG&A expenses increased 4% (flat on an underlying basis). Higher operating costs were offset by tight management of discretionary spending.

Advertising expenses in the reported quarter accelerated 59% to $121 million on a reported basis. On an underlying basis, advertising expenses increased 53% year over year. Moreover, advertising expenses increased 4% (up 2% on an underlying basis) in fiscal 2021. The increase in advertising investments can be attributed to the accelerated spending in the second half of fiscal 2021 mainly for the Jack Daniel’s “Make It Count” campaign.

Operating income declined 10% to $168 million on a reported basis but increased 7% on an underlying basis. Operating margin declined 570 bps to 20.7% in the fiscal fourth quarter. The decline in operating income was driven by gross margin contraction as well as operating expense deleverage. In fiscal 2021, reported operating income rose 7% (up 4% on an underlying basis).

Balance Sheet & Cash Flow

Brown-Forman ended fiscal 2021 with cash and cash equivalents of $1,150 million, and long-term debt of $2,354 million. Its total shareholders’ equity was $2,656 million. In fiscal 2021, it generated $817 million in cash from operating activities. Moreover, it generated a free cash flow of $755 million in fiscal 2021.

The company declared a quarterly cash dividend of 17.95 cents per share on Class A and Class B shares. The dividend is payable Jul 1, 2021, to shareholders of record as of Jun 8.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.

VGM Scores

At this time, Brown-Forman B has a subpar Growth Score of D, though it is lagging a bit 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 F. 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 #5 (Strong Sell). We expect a below average return from the stock in the next few months.