In the Spotlight - Brown-Forman
A consumer shift to lower-price Bourbon has begun to eat into Brown-Forman's flagship Jack Daniel's and Southern Comfort brands, but several analysts believe the US drinks group remains in decent shape for the longer term, writes Michelle Russell.
Continued economic weakness and a strengthening dollar weighed on Brown-Forman's third-quarter results this week as the company lowered its outlook.
While net profit for the nine months to the end of January rose by 4% year-on-year, coming in at US$354.8m, sales for the maker of Jack Daniels and Southern Comfort were flat at $2.51bn, with operating profit slipping by 2% to $539.6m.
This led to a tumble in shares, a tightening of the group's full-year forecast and, in turn, a mixed reaction amongst the analyst community.
Goldman Sachs analyst Lindsay Mann said Brown-Forman's operating earnings fell short of her forecast, highlighting a growing risk for the company's profit in the coming year, due in part to currency fluctuations and weak consumer spending.
"The current ... multiple could be tough to maintain given mounting earnings risks," Mann said in a research note.
The analyst noted that Brown-Forman's gross profit fell 14% in the third quarter and said the hit from the stronger dollar could be a drag on profits for the next few quarters.
On average, Wall Street analysts expected net income of 77 cents per share.
Brown-Forman lowered its full-year 2009 EPS estimates to $2.70 to $2.90, down from a previous forecast of $3 to $3.20. This news sent the company's shares down more than 8% in early trading on Tuesday.
The company's focus on a number of upmarket brands may have been lucrative in a strong economy as consumer tastes moved to higher-end spirits, but recent results have suggested consumers are now beginning to trade down.
Cheaper brands such as Fortune's (Beam Global) Old Crow Bourbon are now starting to see more interest.
Jack Daniel's and Southern Comfort, meanwhile, both experienced a high single digit depletion decline for the quarter in the US.
Brown-Forman said that its El Jimador and Casa Herradura were negatively affected by inventory reduction, along with the company's developing brands including Bonterra, Woodford Reserve, Tuaca, Chambord's and Sonoma-Cutrer.
UBS analyst Kaumil Gajrawala said that he expects sales trends to worsen in Europe and the US, despite easier comparisons.
"We continue to believe BFB will face challenges from the difficult macro-environment globally despite BFB shifting marketing and promotional focus towards off-premise. We still expect trends to worsen going forward in Western & Eastern Europe, and despite easy comparisons, the US will also likely soften further as the spirits industry is now losing share to beer for the first time in many years."
Gajrawala lowered his 12-month price target for Brown-Forman stock to $41, from $50 previously.
Brown-Forman management was quick to point out that demand for Jack Daniel's was still "stronger than competing whiskey and other upscale brands" including Bacardi, Absolut, Crown Royal, Grey Goose and Jose Cuervo, in the 12 months to 31 January.
Jack Daniel's also stayed strong in certain foreign markets, such as the UK, France, Mexico and Poland and lower price points in emerging markets resulted in encouraging trends in those particular regions for the brand.
Brown-Forman CEO Paul Varga pointed out that while the global economic slowdown had affected sales in the third quarter, it continues to run the company in a manner it believes is "appropriate for this environment".
This manner has involved pulling back on advertising, cutting spend by 19%, and reducing selling, general and administrative expenses by 21%.
While stock analyst Ann Gilpin said she was "a bit uncomfortable" with the pull-back, given the importance of keeping premium spirits brands relevant to consumers in this economic downturn, she remained "encouraged" that the company is pulling back on discretionary spending and lowering performance-related compensation.
In a conference call with industry analysts, CEO Varga said Brown-Forman said that the company is taking a more "conservative" approach to advertising because "in many, many markets the receptivity of consumers is lower than it would have been a year or two ago".
The company said it is shifting some advertising dollars to in-store promotions and discount programmes.
Gilpin, however, maintains that the company is a "solid operator in a very stable and profitable industry" and remains bullish on the company's long-term prospects.
Many investors believe that Brown-Forman remains highly profitable. with a "solid outlook" thanks to good potential in both developing and developed markets.
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