Brown-Forman cuts sales and profit forecast

Brown-Forman’s shares tumbled by 11% when it announced weaker than expected fiscal second-quarter earnings and lowered its guidance for the remainder of its financial year to the end of next April.

Following a strong performance in 2022, Brown-Forman’s shares have lost more than 18% so far this year while overall Wall Street is nearly 20% ahead.

The company had net income of $242 million, or 50 cents a share, for the three months to the end of October compared with $227 million, or 47 cents a share, in the same period last year. Sales rose 1% to $1.107 billion. These figures were marginally below market expectations.

Trade conditions in the US home market, prompted the Louisville company to reduce its forecasts for the second half of its year.

It now expects full-year organic sales growth of 3% to 5%, down from guidance issued in September of 5% to 7% growth.

That is despite the expected continued growth from the recently acquired Gin Mare and Diplomatico rum brands which have increased their net sales by 2% since April.

In addition, the New Mix RTD category generated organic net sales growth of 22%. By comparison the original Jack Daniel’s Tennessee Whiskey saw its organic sales fall by 2%. In the first six months of 2022 they rose by 9% as part of the post pandemic “revenge spending” spree.

Boosted operating income

In the three months to the end of September, the company boosted operating income by 8% to $339 million and diluted earnings per share by 6% to $0.50.

Overall net sales for whiskey products declined 2% in the first half of the year with the Jack Daniel’s brands’ seeing net sales decline by 1% driven by lower volumes for Jack Daniel’s Tennessee Whiskey, Jack Daniel’s Tennessee Honey, and Gentleman Jack.

These were partially offset by the growth of Jack Daniel’s Tennessee Apple and Jack Daniel’s super-premium expressions led by Jack Daniel’s Sinatra, Jack Daniel’s Bonded Rye, and Jack Daniel’s Single Barrel.

With an exceptionally high comparison in 2022, Woodford Reserve’s reported net sales declined 3% and Old Forester’s by 5%.

This is further evidence that American consumers have become cost-conscious and are shopping for cheaper alternatives to premium priced brands as inflation erodes spending power.

In the three months to the end of October Brown Forman’s depletions to the trade fell by 2% across the portfolio compared with the same period in 2022.

The company has taken a more conservative view about raising its prices than many competitors, but higher costs of agave, wood, and glass have put sustained pressure on margins for the whiskey maker, offsetting gains made from a let up in supply chain costs.

Strong shape

“Fundamentally, our brands remain in very strong shape,” chief executive Lawson told analysts.

“However, over the last couple of months, we have seen a slowdown in consumer spending similar to the trends we’re seeing across total distilled spirits and other consumer packaged goods.”

“While we grew at a slower pace than anticipated”, he said, “we delivered strong gross margin expansion and continued to invest strongly behind our brands.”

He said demand “continues to reflect a normalization back to our more historical trends” following the height of the Covid-19 pandemic.

The company told investors: “While we remain optimistic about our prospects for growth of organic net sales and organic operating income in fiscal 2024, evolving global macroeconomic conditions continue to create a challenging operating environment tempering our expectations.”

Tariffs

The lowered forecasts echo those from Diageo, which last month stunned shareholders when it predicted that its profits in the first half to the end of this month would take a minimum 2% hit compared with 2022 due to a 11% sales slump in Latin America.

A further negative factor for investors is that from the start of next month Brussels is planning to reintroduce 50% tariffs on American whiskey being imported by the European Union.

The move is all part of a retaliatory package of tariffs being imposed on US goods by the EU in relation to an ongoing dispute over steel and aluminium.

Whiting told analysts that Brown Forman “continues to work with governments on both sides of the Atlantic, advocating for a solution that brings long-term stability to the US and EU trade relationship.”