Brown-Forman raised eyebrows yesterday (14 January) with news of its latest efforts to kick-start growth but the reaction to the US spirits giant’s announcement has been positive among industry watchers on Wall Street at least.
The company, which, like many of the major players in US spirits has seen growth slow significantly in recent quarters, is looking for up to $80m in annualised savings – and will reinvest a “portion”, the Woodford Reserve maker said, to “accelerate growth”.
The savings will come from the closure of the Brown-Forman Cooperage barrel-making site (the business expects to receive at least another $30m from selling off those assets), a series of executive changes and the cutting of more than 600 jobs worldwide.
“Today’s announcement will ensure we have the structure and teams in place to continue on this path, while also making investments that we believe will facilitate growth for generations to come,” Brown-Forman president and CEO Lawson Whiting said.
With Brown-Forman coming under pressure in the US (which still accounts for 45% of annual net sales) in recent months and with the wider spirits market Stateside still in the doldrums, it wouldn’t be a surprise if some took the company’s announcement as another sign of the challenging trading conditions in the country.
The most recent financial results Brown-Forman has issued were published in December and covered the six months to the end of October.
During that half-year period, the Jack Daniel’s maker saw its net sales fall 5% to $2bn, a result that was flat on an organic basis. Operating income was down 7% and diluted earnings per share decreased 3%.
The second quarter saw an upturn overall; net sales were flat on a reported basis but grew 3% organically. However, that increase was principally due to Brown-Forman’s performance in emerging markets like Brazil and Turkey. In the US, net sales dropped 3% on an organic basis, driven by lower volumes.
At the start of the year, US market figures released by the National Alcohol Beverage Control Association (NABCA) showed the spirits category saw sales volumes decline 0.6% in the year to the end of November. The NABCA data, which covers 18 control states and includes off- and on-premise sales, is seen as a more accurate reflection of category health compared to Nielsen given its inclusion of figures from liquor stores and the on-trade.
Brown-Forman has been busy making itself a more international company but its home market remains a significant part of the business. Given the sluggish state of the US spirits category and the possible threat of a tariff war sparked by the new Trump administration, it would be logical to see Brown-Forman’s shake-up as a sign the company’s management is downbeat about the months ahead.
However, equity analysts covering the Herradura Tequila owner suggested there were positives to take from Brown-Forman’s announcement.
“The pessimist would argue that today’s announcement might imply that Brown-Forman believes that some challenges the spirits industry faces today are permanent and is adjusting the business accordingly,” Nadine Sarwat, an analyst at Bernstein Société Générale, wrote in a note to clients yesterday.
According to Sarwat, Brown-Forman’s shares are “trading at all-time lows”, reflecting, she said, the “perfect storm” of a “normalising” US spirits market, the prospect of tariffs (both from the US on Mexico and the potential of retaliatory measures from the EU should Trump slap tariffs on the bloc) and the possibility of a “glut” of US whiskey.
There are, of course, debates to be had about the nature of all three but there is no question there are clouds looming over the US spirits industry.
However, Sarwat put forward a more positive take on Brown-Forman’s announcement, which includes the appointment of a new CMO and fresh faces leading its business in the Americas and its division covering Europe, Africa and Asia-Pacific.
“The optimist would argue that cost savings programmes are a normal (and healthy) part of doing business for staples and that today’s announcement shows welcome proactivity by management,” Sarwat said. “As always, the truth likely lies somewhere in the middle, though we lean slightly more positive on this news. One thing is for sure, though, regardless: Brown-Forman faces a long road ahead.”
Nonetheless, there is a feeling on Wall Street that Brown-Forman’s moves are less a knee-jerk reaction to the current travails in US spirits and more an attempt to position itself for the longer term.
At Barclays, analysts led by Lauren Lieberman point out the job cuts are “only the second large-scale RIF [reduction in force] in the company's history”, with the last being more than ten years ago.
Lieberman described the changes as “thoughtful, long-term oriented decisions” made by Brown-Forman to “support the growth profile of the evolved portfolio”.
She added: “Each of the leaders with updated ELT [executive leadership team] appointments have long-standing tenures with the company and already played a role in developing the long-term business plans, so we don’t view today’s update as a signal of any major shifts in strategy.
“Importantly, we think the changes … highlight Brown-Forman’s ability (and willingness) to adapt to support its long-term growth ambitions, with the anticipated savings enabling incremental reinvestment to accelerate growth.”
Once the dust settles on the changes, all eyes will be on how quickly Brown-Forman can start to eke out some improvements in sales and profitability.
"Brown-Forman shake-up wins praise amid spirits industry downturn" was originally created and published by Just Drinks, a GlobalData owned brand.
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