BF.B Brown Forman Corp

Fortune Brands Inc.'s (FO) adjusted earnings of 59 cents a share for the first quarter of fiscal 2011 beats the Zacks Consensus Estimate of 51 cents and rose 20.4% from the prior-year quarter. Earnings, on a GAAP basis, were 52 cents per share compared with 47 cents per share posted in the year-ago quarter.

Higher volumes, new spirits distribution agreement in Australia and favorable currency translations helped the company to report better-than-expected first-quarter 2011 results. However, gains from these items were partially offset by higher commodity costs, divestitures and increased investment in brand creation.

Quarterly Details

Net sales during the reported quarter grew 8.1% year over year to $1,757.4 million. Total revenue beats the Zacks Consensus Estimate of $1,618.0 million. Fortune Brands’ adjusted operating income grew by 10.1% to $177.3 million and operating margin accordingly increased by 20 basis points to 10.1%.

Fortune Brands' Beam Spirit business outperformed in the key markets including the U.S., U.K., India, Germany, Spain and Australia. During the quarter, net sales of the company's spirit business grew by 17.4% to $673.1 million. New product launches and long-term brand building measures helped operating income to grow by 25.5% to $144.4 million.

Net sales from the company's Home & Security business reported a growth of 2.3% to $714.2 million. The softer growth in the segment was primarily due to tougher comparison of a double-digit growth in the year-ago quarter. Moreover, Fortune Brands' operating income plunged 73.8% from the prior-year quarter to $6.2 million primarily due to higher commodities costs and increased investments in brand-building initiatives and new businesses.

During the quarter under review, the company's Golf business net sales grew by 4.7% to $370.1 million primarily due to a 17.0% increase in the comparable sales. However, operating income declined 2.5% to $43.3 million.

At the end of the quarter, Fortune Brands had cash and cash equivalents of $269.2 million and long-term debt of $3,671.3 million compared with a cash balance of $289.7 million and long-term debt of $3,630.8 million in the prior-year quarter.

During the quarter, the company generated a negative free cash flow of $242.1 million compared with $103.4 million in the prior-year quarter. For 2010, Fortune Brands expects free cash flows of $450 million to $525 million.

Guidance

The company expects to sustain its growth momentum into fiscal year 2011. Fortune Brands anticipates earnings to grow in the range of high-single-digit to high-teens despite higher commodity costs and investments to support long-term growth.

Besides, management expects the second quarter results to face challenging comparisons against 2010 results. Moreover, management believes that natural disaster in Japan and sale of Cobra in 2010 will affect the second-quarter results by 5 cents.

Business Restructuring

Recently, Fortune Brands announced its intention to split the company into three standalone units, giving investors pure plays in golf, home products and alcoholic drinks. After the separation, the ongoing company will be re-named as Beam Inc. The company's home products business will retain its name of Fortune Brands Home & Security.

Moreover, the company revealed that it would spin-off its home and security business to shareholders in a tax-free transaction. Fortune Brands' Golf business will also retain its name, Acushnet Company. The company also plans to either spin-off or sell its golf business.

Consequent to the spin-off, the company will continue to subsist as a publicly traded manufacturer of distilled spirit. This unit has parented brands like Jim Beam bourbon, Courvoisier cognac and Sauza tequila. Fortune Brands looks forward to pull off this strategic restructuring within the next several months.

Besides, the company faces intense competition from well-established players in the market such as Diageo plc (DEO) and Brown-Forman Corporation (BF.B) in its spirits business and Masco Corporation (MAS) in its home and hardware business.

Fortune Brands also encounters competition from Nike Inc. (NKE) in the golf business. Further, global competitive conditions have also been intensified. Consequently, risk associated with operating in such a competitive environment may undermine the company's future operating performance.

Currently, Fortune Brands has a Zacks #4 Rank, implying a short-term 'Sell' rating on the stock. Besides, the company retains a long-term 'Neutral' recommendation.

 
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