Brown-Forman Earnings: Channel Inventory Shift a Near-Term Headwind, but Premium Branding Intact

We plan to maintain our $68 fair value estimate for wide-moat Brown-Forman BF.B after absorbing the firm’s first-quarter results and view shares as fairly valued. While the 3% sales growth and 7% EPS decline missed our forecasts of increases of 4% and 5%, respectively, we attribute the soft performance to temporary factors, including distributor inventory normalization and high ad spending tied to Jack & Coke’s global launch. We view the firm’s targets for 2024 sales and operating profits to grow 5%-7% and 6%-8%, respectively, as attainable. Our 10-year forecasts remain in place, calling for mid-single-digit annual sales growth and mid-30s operating margins on average.

The soft top-line growth is due to tough comparison, an 11% increase in the year-ago quarter driven by above-trend orders from U.S. distributors to rebuild whiskey inventory after supply shortages. We expect the inventory headwind to reverse in the second half. More important, we view end market depletion trends as healthy, supported by Jack Daniel’s brand strength and the launches of its Tennessee Apple flavor and Bonded Series that resonate with consumers. Outside of whiskey, ready-to-drink products (12% of sales) and tequilas (8%) both posted solid sales growth, up 9% and 17% thanks to wider distribution and new releases. The Jack & Coke drinks (jointly with wide-moat Coca-Cola) secured a 2% category value share within months of its U.S. launch, and we expect accelerating international launches to further elevate Jack Daniel’s brand visibility and expand the addressable market.

Gross margins expanded by 90 basis points to 62.7% thanks to pricing, and we expect price mix and easing glass and agave costs to help return this matric to the mid-60s by 2027. Higher ad spending for Jake & Coke in summer and the transition to in-house sales in Japan drove operating margins down 260 basis points to 31.4%, but we expect selling and marketing expenses to normalize over the next year, growing in line with sales.