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Although tariffs took a toll on profit margins and Brown-Forman (NYSE: BF-A) (NYSE: BF-B) missed analyst sales expectations, the owner of Jack Daniel's Tennessee whiskey still turned in a surprisingly strong performance in its fiscal 2019 third quarter.
Earnings per share of $0.47 came in ahead of the consensus estimates of $0.44, and pushed on by continued uptake of its super-premium bourbon offerings, Brown-Forman has so far overcome what could have been a very difficult period. Yet there are only so many costs the distiller can absorb, and that may weigh on its future performance.
Image source: Jack Daniel's.
Still the domestic leader
Underlying net sales rose 4% in the quarter compared to the year-ago period, driven higher by 21% growth in sales of super-premium brands Old Forester and Woodford Reserve. The latter is now on track to be the single largest contributor to Brown-Forman's U.S. growth this year, and the distiller says the former is positioned to be "a real leader in the renaissance of American whiskey." Together they're approaching 1 million cases sold.
Also pushing sales higher was strength in the tequila category, with Herradura at 200,000 cases and el Jimador hitting 600,000 cases. Although perhaps not as well-known as some other competing brands from rival distillers, together with the bourbon brands they represent Brown-Forman's primary growth drivers.
Brown-Forman is also actively seeking out other brands that will be the levers it pulls in the future to capitalize on the premiumization trend that has swept across the spirits industry. Gentleman Jack, Jack Daniel's Single Barrel, and Jack Daniel's Tennessee Rye are growing nicely and building out a profitable niche for the Jack Daniel's brand.
Cultivating an international flavor
In Europe, Gentleman Jack and Woodford Reserve are leading the way, but the tariffs that were imposed on whiskey in retaliation for President Trump raising duties on steel and aluminum are providing near-term headwinds.
Brown-Forman says the tariffs make its strategy to expand sales of the brands further "complicated," but it will invest in both regardless, betting the long-term payoff will be worth it. Tariffs, though, lowered the distiller's underlying year-to-date net sales by 1%, and if they remain in place, the total cost would be about $125 million.
Profits also took a hit as Brown-Forman absorbed the tariffs' higher costs. Gross margins fell 190 basis points, with two-thirds of that the result of the distiller absorbing the higher costs for its customers. Even so, net income rose 19% to $227 million.