Brown-Forman Beats Estimate - Analyst Blog

Brown-Forman Corp. (BF.B), a leading global producer and distributor of premium alcoholic beverages, recorded fiscal 2011 second-quarter earnings of $154.0 million or $1.05 per share, compared with $147.3 million or 99 cents in the year-ago quarter. Quarterly result outpaced the Zacks Consensus Estimate of $1.00 per share.

Quarterly Details

Brown-Forman's net sales recorded a growth of 1.0% to $905.7 million from $892.9 million in the prior-year quarter. The growth was primarily attributable to solid performance in Australia, Mexico, Spain, the U.K., Germany, and Turkey offset by a weak performance in the U.S. and Russia. Brand introduction and innovation also propelled net sales.

During the quarter, Brown-Forman's gross profit grew 4.0% year over year to $458.8 million, while gross margin grew 110 basis points (bps) year over year to 50.7%. Advertising expense inched up modestly by 1.0% year over year to $93.5 million, primarily due to higher spending to support brands.

Selling, general and administrative expenses rose 6.0% year over year to $132.9 million, mainly due to charges related to changes to the company's route-to-market in Germany, Brazil, Canada, and Russia. Conversely, Brown-Forman's operating profit increased 4.0% year over year to $235.0 million, while operating margin increased 60 bps to 25.9%.

Balance Sheet & Cash Flow

Brown-Forman ended the quarter with cash and cash equivalents of $155.7 million. The long-term, debt-to-capitalization ratio at the end of the quarter came in at 20.5%.

Year to date, Brown-Forman generated $177.8 million of cash from operations and deployed $59.7 million toward debt repayment, $87.9 million for dividend payout, and $15.1 million on capital expenditures. The company repurchased up to $58 million of Class A and Class B shares as part of its authorization, which expired on December 1, 2010.

Guidance and Zacks Consensus

Moving forward, Brown-Forman anticipates moderate improvement in global economic conditions and customer trends in fiscal 2011. Accordingly, the company expects earnings to range between $3.18 and $3.42 per share in the fiscal year. The Zacks Consensus Estimate for fiscal 2011 is currently pegged at $3.30 per share, which increased by 2 cents over the past one month.

The company faces intense competition from other well-established players in the industry, including Fortune Brands Inc. (FO), Constellation Brands Inc. (STZ). and Diageo plc (DEO).

We maintain our Outperform recommendation on Brown-Forman. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no definite directional pressure on the shares over the near term.