Brown-Forman Can Overcome Headwinds
Despite near-term challenges, we see substantial opportunity in the above-premium whiskey market and contend that the wide-moat company will be a beneficiary of strong consumer demand for higher-end spirits.
Wide-moat Brown-Forman (BF.B) reported fiscal 2017 results slightly below our expectations, with net sales for the year down roughly 3% compared with our negative 1.5% estimate, due to stronger-than-expected currency headwinds and a smaller comparable revenue base following the divestiture of the Southern Comfort and Tuaca brands at the end of fiscal 2016. Despite these near-term challenges, we continue to see substantial opportunity in the above-premium whiskey market and contend that Brown-Forman will be a beneficiary of strong consumer demand for higher-end spirits, particularly as it capitalizes on Jack Daniel’s brand equity through the introduction of Tennessee Rye and expands into the fast-growing Irish whiskey market (which posted high-teens domestic volume growth in 2016, according to the Distilled Spirits Council) with the launch of Slane Irish Whiskey. We plan to adjust our $44 fair value estimate upward by a few dollars as we incorporate the benefit of the time value of money and lower effective tax rates (based on expected U.S. corporate tax reform in 2018), which will offset a tempered short-term outlook.
While we expect foreign exchange pressure to persist into the beginning of fiscal 2018, an increasing proportion of sales from more premium brands (sales of mainstream offerings Canadian Mist and Early Times continued to decline over the year) should yield positive price/mix effects. We were pleased to see a return to growth in the Travel Retail channel (up 3% year over year), which, by our estimates, contributes 3%-4% of revenue, thanks to increased distribution of Woodford Reserve and improved trends in European travel (around one third of travel retail segment). Although annual gross margin of 67.5% was weaker than we had expected (down 190 basis points over last year and 200 basis points below our forecast), we expect sustained growth in higher-margin, super-premium products will allow for strengthened profitability in fiscal 2018 and beyond.
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Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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