Despite currency hit, Brown-Forman reports quarter was strong and confirms full-year growth outlook

LOUISVILLE, Ky.–(Aug. 26, 2015) — Brown-Forman Corp. reported net sales declined 2 percent in U.S. dollar terms to $900 million, but increased 7 percent on an underlying basis for its first quarter ended July 31, 2015. Reported net sales growth was negatively impacted by 9 percentage points, the company said, due to increases in the value of the dollar compared to currencies in which foreign sales occurred.

Reported operating income increased 3 percent to $227 million, an increase of 9 percent on an underlying basis. Diluted earnings per share increased 7 percent to $0.75 compared to $0.70 in the prior year period.

“Continuing to build on our results of the last few years, we are off to a strong start in fiscal 2016,” Paul Varga, the company’s CEO, said. “Despite a volatile global economy, adverse foreign exchange, and increasing competitive intensity, our growth in underlying sales and operating income were impressive, and continued to compare quite favorably to our industry competitive set.”

Varga added, “These results were again driven by the Jack Daniel’s trademark and our leading portfolio of American whiskey brands. Given our first quarter results and expectations for the continued global growth of our brands, we are confirming our fiscal 2016 outlook of 6 percent to 7 percent underlying sales growth, percent to 10 percent underlying operating income growth, and EPS in the range of $3.40-$3.60.”

First Quarter 2016 Highlights

• Underlying net sales increased over 7 percent:
—Price/mix contributed 2 percentage points to net sales growth and gross margin grew 80 bps
—The Jack Daniel’s family of brands grew underlying net sales 6 percent (-3 percent reported in dollars)
—Jack Daniel’s Tennessee Honey grew underlying net sales 18 percent (+4 percent reported)
—The company’s super and ultra-premium whiskey brands grew underlying net sales double-digits, including 28 percent net sales growth from the Woodford Reserve family of brands on both an underlying and reported basis
—The el Jimador and Herradura families grew underlying net sales 11 percent (-5 percent reported) and 28 percent (+14 percent reported), respectively
—Emerging markets grew underlying net sales 11 percent (-9 percent reported)
—Underlying operating income increased 9 percent

First Quarter 2016 Performance By Market

Top-line results in the United States remained strong, with underlying net sales growth of 10 percent (8 percent reported). Sales growth was primarily driven by volume growth, fueled by the launch of Jack Daniel’s Tennessee Fire, as well as improvements in price/mix. Jack Daniel’s Tennessee Fire is now in distribution across all 50 states and the company believes the brand is enjoying rapid consumer and trade acceptance, helping drive almost four percentage points of underlying net sales growth in the United States in the first quarter. Results benefited from continued strength across the company’s portfolio of leading American whiskey brands, including the Jack Daniel’s family of brands, the Woodford Reserve family of brands and Old Forester.

Underlying net sales grew 11 percent (-9 percent reported) in the emerging markets, powered by market share gains in these fast-growing markets. The company achieved double-digit gains in underlying net sales in several markets, including Brazil, Mexico, Poland, Turkey, emerging Africa and Ukraine. Russia experienced a double-digit decline as the weak economy and devaluation of the ruble has negatively impacted consumer demand.

In developed markets outside of the United States, underlying net sales grew 5 percent (-8 percent reported). Underlying net sales in the United Kingdom, Germany, and France grew double digits, while solid gains were also registered in Canada, Japan, and New Zealand. Underlying net sales declined double digits in Australia due to the combined effects of a weak economic backdrop, a tough competitive landscape, and a challenging excise tax environment for spirits.

Underlying net sales in Global Travel Retail declined -18 percent (-36 percent reported), driven by volume declines in America’s duty free and Europe’s travel retail channels. These declines appear to have been driven by the combination of the timing of orders from customers as well as significantly lower spend in the channel by Russian travelers.

First Quarter 2016 Performance By Brand

The company’s underlying net sales growth was led by the Jack Daniel’s family, up 6 percent. Jack Daniel’s Tennessee Honey grew underlying sales by 18 percent, powered by large gains in markets outside of the United States. Jack Daniel’s Tennessee Fire contributed almost three percentage points to the family’s underlying net sales growth.

Brown-Forman’s portfolio of super- and ultra-premium whiskey brands, including Woodford Reserve and Woodford Reserve Double Oaked, Jack Daniel’s Single Barrel, Gentleman Jack, Sinatra Select, No. 27 Gold, and Collingwood, collectively grew underlying net sales by double digits. Old Forester also grew underlying net sales well into the double digits, and the Woodford Reserve family of brands grew underlying net sales 28 percent.

The Finlandia vodka family of brands returned to modest growth, posting a 3 percent increase in underlying net sales (-18 percent reported) primarily due to Poland, which has largely worked through last year’s excise-tax driven issues but is still suffering from weak consumer demand.

The el Jimador and Herradura families grew underlying net sales by 11 percent and 28 percent, respectively, with double-digit gains for both brands in the United States. Results in Mexico were also strong, including double-digit gains for New Mix and Herradura, although New Mix growth was partly related to customer buying patterns. El Jimador grew underlying sales outside of the United States in the first quarter despite volume declines in Mexico as the company continues to reposition the brand at a higher level through additional price increases.

The Southern Comfort family of brands experienced a 4 percent decline in underlying net sales in the quarter, driven by competitive pressure from new flavored whiskies.

Fiscal Year 2016 Outlook

Significant uncertainty remains around the global economic environment and its potential impact on our business, making it difficult to predict future results.

Assuming no further deterioration in the global economy, the company expects continued growth across most major markets, driven by the favorable dynamics that have been fueling growth since fiscal 2012, including strong global demand for authentic American whiskey brands, consumer interest in flavored whiskey, and a trend towards premium spirits.

In fiscal 2016, the company continues to expect 6 percent to 7 percent growth in underlying net sales. The company also expects gross margins to expand modestly in fiscal 2016, with additional operating margin expansion driven by leveraging the SG&A investments made over the past few years. The company believes that this should result in 8 percent to 10 percent growth in underlying operating income, and diluted earnings per share of $3.40 to $3.60 in fiscal 2016.

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