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Will Tariffs & Costs Hurt Brown-Forman's (BF.B) Q3 Earnings?

Brown-Forman CorporationBF.B is set to report third-quarter fiscal 2019 results on Mar 6, before the market opens. In the las t report ed quarter, the company delivered a positive earnings surprise of nearly 2%. Notably, this leading producer and distributor of premium alcoholic beverages delivered positive earnings surprise consecutively for the last six quarters. The company's average positive earnings beat for the trailing four quarters stands at 4.7%.

The question lingering in investors' minds now is whether Brown-Forman will be able to post positive earnings surprise in the quarter to be reported. The Zacks Consensus Estimate for earnings in the fiscal third quarter is pegged at 44 cents, reflecting in-line results compared with the year-ago quarter. Further, the Zacks Consensus Estimate for earnings for the fiscal third quarter remained unchanged in the last 30 days. The Zacks Consensus Estimate for revenues is pegged at $907.4 million, up nearly 3.4% from the year-ago quarter.

Brown-Forman, which belongs to the Zacks Beverages - Alcohol industry, has outperformed the S&P 500 in the past month, reflecting a positive sentiment ahead of the earnings release. The company's shares have increased 5.1% while the S&P 500 grew 2.9%.

Brown-Forman Corporation Price and EPS Surprise

Brown-Forman Corporation Price and EPS Surprise | Brown-Forman Corporation Quote

Factors at Play

Brown-Forman is favored due to its solid brand portfolio, positive earnings surprise history, expansion plans and shareholder-friendly moves. The company is benefiting from solid growth in underlying sales, improved margins, strength in American whiskey and persistent momentum in focus categories. Its underlying sales improved for nine straight quarters, driven by broad-based growth across geographies and balanced contribution from its portfolio of brands.

The company is confident of capitalizing on its strategy for American Whiskey while benefiting from investments in its brands' portfolio over the years. It believes that the global economic environment has improved in the past year, with favorable conditions in many emerging markets. This should position the company for growth in the quarters to come.

Despite strong start to fiscal 2019, the company believes intensified competition in the developed economies alongside rising concerns related to the recently enacted retaliatory tariffs on American whiskey is likely to hurt near-term results. Tariffs presented challenges across many of the company's operations, including production and supply chain operations, with major impacts on markets across Europe, Mexico and Canada. Notably, underlying net sales growth for the fiscal second quarter was negatively impacted by nearly two percentage points due to tariff-related inventory reductions (giveback) linked to tariff-driven buy-ins in the fiscal first quarter. The company began realizing net tariff-related costs in the fiscal second quarter.

This combined with higher input costs and impacts of the adoption of the revenue recognition standard led to declines of nearly 200 bps and 100 bps in the fiscal second quarter and the first half of fiscal 2019, respectively. Further, operating margin for the first half included impacts of nearly 2 percentage points from incremental costs associated with tariffs.

The company estimates effects of tariffs in Europe, Mexico, Canada and Turkey to remain in place through the rest of fiscal 2019. Further, it expects gross margin to remain pressured in the second half due to tariff-related costs. Consequently, the company estimates gross margin decline of more than 200 bps in fiscal 2019.

What the Zacks Model Unveils

Our proven model does not conclusively predict that Brown-Forman is going to bea t earnings estimates in this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Brown-Forman's Earnings ESP is 0.00% and it currently carries a Zacks Rank #3 (Hold). Although the company has a favorable rank, which increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.

Stocks Poised to Beat Earnings Estimates

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Turning Point Brands Inc. TPB has an Earnings ESP of +11.11% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

Ollie's Bargain Outlet Holdings, Inc. OLLI has an Earnings ESP of +1.43% and a Zacks Rank of 2.

Costco Wholesale Corporation COST has an Earnings ESP of +0.62% and a Zacks Rank #3.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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