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Brown-Forman B (BF.B) Down 5.5% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Brown-Forman B (BF.B - Free Report) . Shares have lost about 5.5% 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 Q1 Earnings Meet Estimates, Sales Increase

Brown-Forman reported first-quarter fiscal 2022 results, with the top line surpassing the Zacks Consensus Estimate and the bottom line meeting the same. Sales increased year on year, backed by growth across brand categories and regions.

Earnings per share of 40 cents came in line with the Zacks Consensus Estimate. The bottom line declined 41% year on year.

Net sales of $906 million surpassed the Zacks Consensus Estimate of $852.3 million. The top line increased 20% year over year, on a reported basis. On an underlying basis, net sales were up 18% from the prior-year quarter’s levels. Sales growth was supported by growth across all geographic regions and the Travel Retail channel. Moreover, the Jack Daniel’s family of brands, Premium bourbons and the tequila portfolio delivered strong growth.

Volume fell 1% in the first quarter, as growth across the portfolio was offset by decline in New Mix. Price/mix increased 19% due to favorable impact of faster growth of higher-priced brands and favorable mix shift to the on-premise channel.

Management is impressed with the strong start to the fiscal year. The results reflect on the company’s portfolio strength. The quarter benefitted from re-opening of on-premise, sustained at-home consumption and continued premiumization trends. The company expects the business environment to keep improving. It anticipates underlying sales and operating income growth in mid-single-digits for fiscal 2022. However, supply chain disruptions are likely to put pressure on the company’s gross margin during the fiscal.

Deeper Insight

Growth in the United States, the company’s largest market, was driven by double-digit growth from Jack Daniel’s Tennessee Whiskey, premium bourbons and tequilas. Jack Daniel’s Tennessee Whiskey gained from improved volumes and favorable channel mix shift to the on-premise channel. Meanwhile, gains in the developed international markets were led by Germany, France, Korea and Spain. The emerging markets registered double-digit net sales growth, backed by volume gains across most markets, partially offset by declines throughout most countries in Southeast Asia.

Net sales in Travel Retail gained from favorable year-on-year comparison, as the company witnessed significant declines in the prior-year quarter due to the pandemic.

Net sales for the Jack Daniel’s family of brands were up 20% on a reported basis and 16% on an underlying basis. The upside was mainly driven by Jack Daniel’s Tennessee Whiskey, which benefited from higher volumes globally and favorable channel mix in the United States. Net sales growth in Jack Daniel’s Tennessee Apple’s was driven by the ongoing international launch.

Premium bourbon brands reported sales growth of 34% in the first quarter, led by growth in Woodford Reserve and Old Forester. On an underlying basis, sales in this category rallied 36%.

The company’s tequila brands witnessed 32% net sales growth on a reported basis, while it went up 23% on an underlying basis. The category benefitted from growth for Herradura and el Jimado, partially offset by lower volumes of New Mix in Mexico.

Margins & Costs

For first-quarter fiscal 2022, Brown-Forman’s gross profit amounted to $553 million, which improved 19% year over year on a reported basis and 17% on an underlying basis. The reported gross margin contracted 70 basis points (bps) to 61% due to higher input costs and adverse impacts from supply chain constraints. The downsides were partially offset by the favorable shift in portfolio mix toward higher-margin brands and channels.

Selling, general and administrative (SG&A) expenses increased 14% year over year on a reported basis in fiscal first quarter. On an underlying basis, SG&A expenses were up 11% year over year. The metric was impacted by the timing of higher compensation expenses, increase in non-income tax reserves and cycling against lower discretionary spend in the prior-year quarter.

Advertising expenses in the reported quarter accelerated 46% on a reported basis. On an underlying basis, advertising expenses increased 44% year over year. The upside can be attributed to higher spend for supporting the international launch of Jack Daniel’s Tennessee Apple, higher spend for Woodford Reserve and cycling a substantial reduction in promotional activity.

Operating income fell 25% to $289 million on a reported basis. Nevertheless, the figure increased 15% on an underlying basis. Operating margin declined 27 bps to 31.9% in the fiscal first quarter.

Balance Sheet & Cash Flow

The company ended first-quarter fiscal 2022 with cash and cash equivalents of $1,172 million and long-term debt of $2,346 million. Its total shareholders’ equity was $2,683 million. For the three months ended Jul 31, 2021, it generated $185 million in cash from operating activities, while free cash flow came amounted to $171 million.

The company declared a quarterly cash dividend of 17.95 cents per share on Class A and Class B shares. The dividend is payable on Oct 1, 2021, to shareholders of record as of Sep 3.

Outlook

The company remains cautious regarding the uncertainties tied to operating amid the pandemic along with global supply chain disruptions. In particular, it expects disruptions in the supply of glass. Management expects such downsides to persist during fiscal 2022, with their impact becoming less significant during the second half.  Nevertheless, it has put in place a number of strategies to address the challenges in the business.

The company expects unfavorable impacts from supply chain disruptions and higher input costs related to agave, transportation costs and commodity prices to negatively impact gross margin. As a result of these factors, management expects gross margin to be flat, or slightly down, for the full year.

For fiscal 2022, the company continues to expect mid-single digit growth in underlying net sales, underlying operating expenses and underlying operating income.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

At this time, Brown-Forman B has an average Growth Score of C, though it is lagging a lot 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Brown-Forman B has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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