Zacks Commentary

Brown-Forman Corporation’s (BF.B) fiscal second quarter 2013 (ended October 31, 2012) earnings of 80 cents a share came ahead of the Zacks Consensus Estimate of 78 cents and jumped 11% from 73 cents reported in the comparable prior-year quarter.

However, net sales remained flat on a year-over-year basis at $1,013.8 million as adverse currency exchange rates and spin-off of Hopland wine business more than offset the positives from price increases and volume gains. On an underlying basis, the company’s net sales increased 6%. However, the quarterly sales were well above the Zacks Consensus Estimate of $788 million.

During the quarter, Brown-Forman’s gross profit increased 4% to $524.5 million from $501.9 million reported in the year-ago quarter, primarily due to lower input costs. Consequently, gross margin expanded 222 basis points (bps) to 51.7% compared with 49.5% in the prior-year period.

Selling, general, and administrative expenses (SG&A) increased 8% from the last quarter to $159.1, while SG&A as a percentage of sales increased 121 basis points to 15.7%. Advertising expenses remained flat at $106.6 million.

Operating profit during the quarter climbed 7% to $262.3 million from $246.3 million in the prior-year period, primarily driven by improved gross profit, partially offset by increased SG&A expenses. Consequently, operating margin expanded 157 bps to 25.9% compared with 24.3% in the year-ago quarter.

Balance Sheet & Cash Flow

Brown-Forman ended the quarter with cash and cash equivalents of $368.5 million and long-term debt of $501.4 million. Year-to-date, Brown-Forman generated $164.7 million of cash from operations and deployed $99.5 million for dividend payout.

Guidance Raised

Moving forward, Brown-Forman raised its outlook for fiscal 2013. It now expects fiscal 2013 earnings in the range of $2.58–$2.70 per share, up from its earlier guidance of $2.40–$2.67.

Also, the company anticipates gross margins to improve in fiscal 2013 and consequently raised its forecast for operating income. The company now expects operating income to increase in low double-digits. Moreover, underlying sales are expected to increase in high single-digit.

Currently, Brown-Forman, which competes with Beam Inc. (BEAM), Constellation Brands Inc. (STZ) and Diageo plc (DEO), has a Zacks #1 Rank, implying a short-term ‘Strong Buy’ rating. However, we maintain a long-term ‘Neutral’ recommendation on the stock.