Brown-Forman Earnings: Margin Pressure Sticks, but Premium Portfolio Surprisingly Durable

Wide-moat Brown-Forman posted earnings in line with expectations, with $1.1 billion in sales and $0.21 in EPS beating FactSet consensus sales estimates of $1.02 billion but missing on profitability ($0.47). A measured pace of margin recapture remained front and center, with the combination of inflation, supply chain disruptions, and foreign exchange headwinds dragging gross margin down 170 basis points from the year-ago period to 58.4%. As we digest fiscal third-quarter results, we expect to lower our $73 fair value estimate by a low- to mid-single-digit percentage, with a tougher pricing environment and acquisition integration costs figuring to slow immediate-term margin normalization. Shares fell 3%-4% intraday, leaving them trading in a range we’d consider fairly valued.