Brown-Forman Can Overcome Headwinds

Wide-moat

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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