Brown-Forman Corporation BF.B reported second-quarter fiscal 2016 earnings of 97 cents per share, which missed the Zacks Consensus Estimate of $1.00 but was flat year over year.
Net sales fell 4% year over year to $1,096 million. However, on an underlying basis (excluding negative currency impact and other adjustments), sales grew 5%. Moreover, after deducting excise taxes, sales came in at $854 million, down about 2.6% from the prior-year figure of $877 million. The Zacks Consensus Estimate for the quarter was $859 million.
Despite the negative impact of foreign currency headwinds, the company’s sturdy underlying results can be attributed to its strong portfolio of premium American whiskey brands along with its Jack Daniel’s trademark and a balanced geographic growth.
Quarter in Detail
Brown-Forman’s gross profit declined about 4% to $586 million from $609 million in the year-ago quarter. Gross margin declined 20 basis points (bps) to 53.5%.
Selling, general and administrative expenses (SG&A) fell 4% from the year-ago quarter to $171 million. On the other hand, advertising expenses fell 7% year over year to $115 million.
Operating income remained flat year over year at $302 million, with the operating margin expanded 90 bps to 27.6%, as the decline in gross margin was offset by lower expenses. On an underlying basis, operating income rose 7%.
Balance Sheet & Cash Flow
Brown-Forman ended the second quarter with cash and cash equivalents of $195 million and long-term debt of $1,229 million. The company’s total shareholders’ equity was $2,918 million as of Oct 31, 2015.
In the first half of fiscal 2016, this Zacks Rank #3 (Hold) company generated $161 million of cash from operations. On Nov 19, the company announced a quarterly dividend of 34 cents per share, up 7.9% from the prior dividend of 31.5 cents. The new dividend is payable on Dec 30 to shareholders on record as of Dec 3, 2015.
Additionally, the company bought back about 7.6 million shares for $739 million in the first half of fiscal 2016. Currently, the company has shares worth $256 million remaining to be repurchased.
Fiscal 2016 Guidance
Brown-Forman indicated that future projections have become difficult in the face of the uncertain global economic environment and its impact on businesses. However, anticipating that the global economy will remain at the current levels, the company expects growth to be driven by a sturdy demand for authentic American whiskey brands worldwide, consumer interest in flavored whiskey, and a rising trend toward premium spirits.
The company reiterated its guidance of 6% to 7% growth in underlying sales in fiscal 2016. It anticipates a modest growth in gross margin, while operating margin is expected to expand further on the back of SG&A investments made over the past few years. Moreover, operating income is likely to increase in the band of 8% to 10% on an underlying basis.
Based on anticipation of incremental negative impact from foreign exchange, the company has projected fiscal 2016 earnings per share in the range of $3.40–$3.60.
Stocks to Consider
Some better-ranked stocks in the beverages-alcohol space are Heineken NV HEINY and Constellation Brands Inc. STZ, both carrying a Zacks Rank #2 (Buy). Another favorably-ranked stock in the related beverages-soft drinks industry is Primo Water Corp. PRMW with a Zacks Rank #1 (Strong Buy).
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