Why Is BrownForman Corporation (BF.B) Down 6.4% Since Last Earnings Report?

A month has gone by since the last earnings report for BrownForman Corporation (BF.B). Shares have lost about 6.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is BrownForman Corporation 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 Estimates, Sales Beat

Brown-Forman reported fourth-quarter fiscal 2020 results, wherein earnings missed the Zacks Consensus Estimate but sales beat the same. Driven by the unprecedented impacts of the ongoing coronavirus outbreak, the company did not provide guidance for fiscal 2021.

Brown-Forman’s earnings per share of 27 cents fell 20% year over year and lagged the Zacks Consensus Estimate of 28 cents.

Net sales of $709 million beat the Zacks Consensus Estimate of $700.8 million but declined 5% on a reported basis. On an underlying basis, net sales declined 10%.

Results have mainly been marred by the impacts of the coronavirus pandemic, which began to spread globally in the middle of March and continued throughout April. This led the company’s on-premise channel — representing 20% of its global business — and Travel Retail to come to a standstill. Prior to this, the impacts of the pandemic were felt on its Asia business, particularly China and Travel Retail. Consequently, in March, the company revised its fiscal 2020 outlook.

Meanwhile, it witnessed strong growth in the off-premise and e-premise channels in most of the developed markets due to increased at-home consumption and pantry loading, as nationwide lockdowns and government restrictions were imposed to curtail the spread of coronavirus.

Deeper Insight

For fiscal 2020, underlying sales were flat year over year, driven by significant disruptions across the globe due to the spread of COVID-19. On a geographic basis, underlying sales growth was the strongest in the United States, its largest market, which recorded 5% growth. Meanwhile, the developed international and emerging markets each reported a 1% decline in underlying sales. Growth in the United States was partly driven by the launch of Jack Daniel’s Tennessee Apple in the fall of 2019, offset by soft growth in the fiscal fourth quarter, owing to the pandemic. Additionally, it witnessed double-digit gains in underlying net sales in aggregate for Woodford Reserve, Old Forester, Jack Daniel’s RTDs, Herradura and el Jimador in the United States.

Growth across the company’s brand portfolio was led by premium bourbon brands, including Woodford Reserve and Old Forester, which reported 21% growth in underlying net sales in fiscal 2020. This growth was led by a 19% rise in underlying sales for Woodford Reserve along with even stronger underlying growth from Old Forester.

Meanwhile, its tequila brands reported a 2% rise in underlying sales growth globally, including a 7% increase for Herradura and 5% for el Jimador. Further, underlying net sales for the Jack Daniel’s family of brands were flat globally as gains from Jack Daniel’s Tennessee Apple, Jack Daniel’s RTDs and Jack Daniel’s Tennessee Honey were offset by declines in Jack Daniel’s Tennessee Whiskey.

However, underlying sales for the company’s non-branded business, comprising used barrels, bulk whiskey and contract bottling, declined 29% on lower used barrel demand and pricing, and a reduction in bulk whiskey sales.

Margins & Costs

In the fiscal fourth quarter, Brown-Forman’s gross profit declined nearly 6% to $453 million, while gross margin contracted 90 basis points (bps) to 63.9%. On an underlying basis, gross profit declined 13%.

Selling, general and administrative (SG&A) expenses rose 3% year over year to $167 million on a reported basis and 6% on an underlying basis. Advertising expenses of $75 million declined 19% on a reported basis and 17% on an underlying basis.

Operating income declined 18% to $187 million on a reported basis and 27% on an underlying basis. Meanwhile, operating margin contracted 420 bps to 26.4%.

Balance Sheet & Cash Flow

Brown-Forman ended fiscal 2020 with cash and cash equivalents of $675 million, and long-term debt of $2,269 million. Its total shareholders’ equity was $1,975 million as of Apr 30, 2020. In fiscal 2020, it generated $724 million in cash from operating activities.

On May 21, the company declared a quarterly cash dividend of 17.43 cents per share on Class A and Class B shares, reflecting an annualized dividend rate of 69.72 cents. The dividend is payable Jul 1, 2020, to shareholders of record as of Jun 8.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months. The consensus estimate has shifted -7.06% due to these changes.

VGM Scores

At this time, BrownForman Corporation has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

BrownForman Corporation has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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