BF.B Brown Forman Corp

Brown-Forman Corporation’s (BF.B) adjusted earnings of 73 cents per share for fourth-quarter 2012 missed the Zacks Consensus Estimate of 76 cents and declined approximately 5.2% from the year-ago earnings of 77 cents. A higher excise tax along with increased operating expenses affected the company’s bottom line.

Including the net effect of Hopland-based wine business, the company’s earnings were $1.13 per share during the fourth quarter of fiscal 2011.

Quarterly Details

Brown-Forman's reported net sales inched up 1% to $801.3 million, missing the Zacks Consensus Estimate of $805 million. However, the company’s underlying net sales registered 10% growth year over year.

During the quarter, Brown-Forman's gross profit inched down marginally by 0.4% from the prior-year quarter to $421.8 million, primarily due to increased excise taxes. Consequently, gross margin contracted 90 basis points (bps) year over year to 52.6%.

During the quarter, the company made huge advertising expenses and registered a decline of 1% to $98.6 million. Selling, general and administrative expenses grew 5% year over year to $175.2 million. Consequently, Brown-Forman's adjusted operating profit declined 2% from the prior-year quarter to $152.3 million, while adjusted operating margin contracted 60 basis points to 19.6% from the prior-year period.

Fiscal 2012 Summary

The company’s net sales during the fiscal increased 6% to $3,614.4 million compared with $3,404.3 million in fiscal 2011, surpassing the Zacks Consensus Estimate of $3,453 million. However, Brown-Forman’s earnings of $3.56 per share during fiscal 2012 fell short of the Zacks Consensus Estimate of $3.59 as well the previous fiscal earnings of $3.57. Including the net effect of Hopland-based wine business, the company’s earnings were $3.90 per share during fiscal.

Balance Sheet & Cash Flow

Brown-Forman ended the fiscal with cash and cash equivalents of $338 million and long-term debt of $506 million (including the current maturities) compared with $567 million and $759 million in fiscal 2011.

During fiscal 2012, Brown-Forman generated $516 million of cash from operations and deployed $192 million for dividend payout, $220 million toward share repurchase, $58 million on capital expenditures and $248 million toward debt repayment.

Guidance

Moving forward, Brown-Forman expects improvement in customer trends to continue in fiscal 2013. The company expects high-single digit growth in net sales and operating income. However, it anticipates that the stronger U.S. dollar value may have an adverse impact on its bottom line.

Currently, Brown-Forman expects fiscal 2013 earnings in the range of $3.60 to $4.00 per share. The current Zacks Consensus Estimate for fiscal 2013 stands at $3.94 per share.

Our Recommendation

Brown-Forman is one of the leading producers and distributors of premium alcoholic beverages in the world. The company commands a strong portfolio of globally recognized brands, such as Jack Daniel’s, Finlandia, Southern Comfort and Canadian Mist. We believe this provides a competitive edge to the company and bolsters its well-established position in the market.

Moreover, we believe Brown-Forman’s strategy of expanding Jack Daniel's market share in developed markets, such as France and the U.S., and emerging markets including Russia, Poland and Mexico, where the whiskey category is in early stages of development will boost its top line.

However, apart from macroeconomic headwinds, distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., European and many emerging markets may lead to increasing risk of a potential excise tax on spirits by the governments of respective countries. The effect of any excise tax increase in future may have an adverse effect on Brown-Forman’s financial performance.

Above all, the company faces intense competition from other well-established players in the industry, including Beam Inc. (BEAM), Constellation Brands Inc. (STZ) and Diageo plc (DEO). Moreover, Brown-Forman also encounters competition from local and regional players in the respective countries. Consequently, this may dent the company’s future operating performance.

Currently, Brown-Forman has a Zacks #4 Rank, which implies a short-term Sell rating. However, we maintain a long-term Neutral recommendation on the stock.

 
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