Driven by positive top-line growth along with lower input costs,
) started the fiscal 2013 with strong first-quarter results. The
company's adjusted earnings for the quarter surged 27.8% to 69
cents per share from 54 cents earned in the previous-year quarter,
beating the Zacks Consensus Estimate of 62 cents.
Brown-Forman's net sales grew 4% to $878.1 million compared with
$840.3 million in the year-ago period primarily driven by price
increase partially offset by adverse currency exchange rates and
spin-off of Hopland wine business. On an underlying basis, the
company's net sales registered 10% growth year over year. However,
quarterly sales were below the Zacks Consensus Estimate of $893
During the quarter, Brown-Forman's gross profit increased 10% to
$464.1 million from $420.3 million primarily due to lower input
costs. Consequently, gross margin improved 290 basis points (bps)
to 52.9% compared with 50% in the prior-year period.
As a percentage of net sales, the company's operating expenses
grew 130 bps to 28.6% primarily due to deleveraged selling, general
and administrative expenses, which increased 40 bps to 16.9%,
partially offset by a leverage of 30 bps in advertising
Operating profit during the quarter increased 19% to $221.7
million from $185.9 in the prior-year period, primarily driven by
improved gross profit, partially offset by increased operating
expenses. Consequently, operating margin expanded 310 bps to 25.2%
compared with 22.1% in the year-ago quarter.
Balance Sheet & Cash Flow
Brown-Forman ended the quarter with cash and cash equivalents of
$361.5 million and long-term debt of $502.1 million. During the
quarter, Brown-Forman generated $87.6 million of cash from
operations and deployed $49.8 million for dividend payout and $17.4
million on capital expenditures.
Moving forward, Brown-Forman confirmed its outlook for fiscal
2013. The company expects improvement in customer trends to
continue in second quarter of fiscal 2013. 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 $2.40 - $2.67 per share.
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
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 hike in excise
tax in the future may have an adverse effect on Brown-Forman's
Above all, the company faces intense competition from other
well-established players in the industry, such as
Constellation Brands Inc.
). Moreover, Brown-Forman 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 #3 Rank, which implies a
short-term Hold rating. Moreover, we maintain a long-term 'Neutral'
recommendation on the stock.
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