As predicted, Brown-Forman's quarterly earnings dip

jpatton1@herald-leader.comAugust 28, 2013 

A bottle of Woodford Reserve was filled at its distillery in Versailles in August.

HERALD-LEADER Buy Photo

Louisville-based beverage giant Brown-Forman Corp. reported Wednesday a dip in first-quarter earnings compared to the previous year, missing Wall Street predictions.

The company said net income was $143 million, down 3 percent from $147 million in the same quarter of the previous year; earnings per share decreased to 66 cents compared to 69 cents.

The drag was caused by distributors and retailers stocking up last year ahead of price increases on Brown-Forman's top-selling products. The outsize sales a year ago made this quarter look weak. Brown-Forman executives had predicted last month, at the annual meeting in Louisville, that this would happen, but they said the rest of the year should pick up.

"Our first quarter unfolded largely as anticipated, and we believe Brown-Forman remains on track to deliver the fiscal 2014 full-year outlook we shared with you last quarter," CEO Paul Varga said in a news release with the figures. "We expect a stronger second quarter against last year's soft comparables, when trade inventories came back into balance after the first-quarter price-increase buy-ins. We are confirming our full-year growth outlook and remain encouraged by the global consumer's continuing interest in premium whiskey."

Net sales for the quarter were up 2 percent to $896 million, with gross profits up 3 percent to $477 million. And sales of the Jack Daniel's family of products continued to be strong, up 4 percent despite the price increases.

Behind that increase in sales:

■ Higher prices contributed 4 percentage points to the underlying sales growth in the quarter.

■ Super- and ultra-premium whiskey brands increased underlying sales 20 percent, including 25 percent growth from Woodford Reserve, the premium bourbon made in Versailles.

■ The Canadian Mist family of brands increased underlying sales 5 percent as maple, cinnamon, vanilla and peach flavors were launched in select markets.

■ Finlandia vodka increased underlying sales 1 percent.

■ Korbel Champagne increased underlying sales 27 percent, as stores and distributors stocked up ahead of a recent price increase.

The higher prices also helped drive the increase in profits, as did brand expansions. Sales of Tennessee Honey, a sweetened Jack Daniel's whiskey spin-off, were up 26 percent, the company said, and Tennessee Honey continues to roll out around the world.

In a conference call with Wall Street analysts Wednesday, Varga said the company has been pleased with the results of the price increases, which have "improved the premium-ness and the special-ness" of both Jack Daniel's Black Label and of Tennessee Honey.

Smaller price increases will be rolling out on Jack Daniel's products this year as well.

The outlook for Tennessee Honey might be expected to plateau as it reaches 90 percent of the current Jack Daniel's geographic distribution by the end of the year, but Brown-Forman sees little sign of slowing sales.

This year, Tennessee Honey will expand into Germany, Russia, France and several smaller European markets, executives said.

They expect it to continue to increase Jack Daniel's market share along the way as it gives the trademark access to a whole new category of drinkers.

"We're seeing very low levels of cannibalization," Varga said. "This is all new consumers, new occasions. ... That's encouraging us to dream a bit bigger."

Sales of ultra-premium whiskey brands including Gentleman Jack, Woodford Reserve, Jack Daniel's Single Barrel and Collingwood contributed significantly to underlying sales, the company said.

Southern Comfort sales continued to slide, down 2 percent, despite a new marketing campaign launched in the United Kingdom and Germany that boosted sales. Sales in the United States were hurt by increased competition in the explosive growth of flavored whiskies, Brown-Forman said.

Globally, advertising expenses were up 12 percent for the quarter, to $103 million, with spending on Southern Comfort, Tennessee Honey and Gentleman Jack's "Order of the Gentleman" campaign.

Brown-Forman reaffirmed its outlook for 2014, saying the company expects high single-digit growth in underlying sales and a 9 percent to 11 percent increase in operating income, which would result in diluted earnings per share of $2.80 to $3 for the year.

Analysts questioned the sales slump of Finlandia and el Jimador tequila. But Brown-Forman executives expressed little concern and said that could be a positive in the long run.

The company uses the entry categories to build access to a country (vodka in Poland; tequila in Mexico). But with the growth of interest in brown spirits, customers migrate to more prestigious and higher-priced whiskey brands, Varga said.

"That shows up in Jack Daniel's. You can't say that about everywhere, but I think we benefit in premium whiskey brands," Varga said. "We have to take a hit for it with a struggling standard price category, but we think for the country overall, it's a net-net benefit."

Shares of Brown-Forman (BFB:NYSE) were down slightly in Wednesday trading.

Janet Patton: (859) 231-3264. Twitter: @janetpattonhl.

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