Brown-Forman Corp. (BF.B), a leading global producer and distributor of premium alcoholic beverages, recorded fiscal 2011 third-quarter earnings of $140.7 million or 96 cents a share, compared with $107.9 million or 73 cents a share in the year-ago quarter. Quarterly results outpaced the Zacks Consensus Estimate of 86 cents a share.
Quarterly Details
Brown-Forman’s net sales recorded a growth of 12.0% to $962.4 million from $861.7 million in the prior-year quarter. The growth was primarily attributable to solid performance in Australia, the U.K., Mexico, Turkey, Germany, France, and Brazil partly offset by weakness in the U.S. and Russia.
During the quarter, Brown-Forman’s gross profit grew 13.0% year over year to $463.5 million, while gross margin increased 50 basis points (bps) year over year to 48.2%. Advertising expense inched up by 5.0% year over year to $92.0 million, primarily due to higher spending to support brands.
Selling, general and administrative expenses rose 8.0% year over year to $142.3 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 30.0% year over year to $225.5 million, while operating margin expanded 320 bps to 23.4%.
Balance Sheet & Cash Flow
Brown-Forman ended the quarter with cash and cash equivalents of $278.6 million and long-term debt of $756.7 million.
Year to date, Brown-Forman generated $399.5 million of cash from operations and deployed $59.0 million toward debt repayment, $279.5 million for dividend payout, and $12.1 million on capital expenditures. The company repurchased up to $117 million of Class A and Class B shares as part of its authorization, which expired on December 1, 2010.
Dividend
During the quarter, Brown-Forman paid a regular quarterly cash dividend of 32 cents a share on Class A and Class B common stock and an additional special cash dividend of $1.00 per share on Class A and Class B common stock.
On January 27, 2011, Brown-Forman’s board of directors approved a regular quarterly cash dividend of 32 cents per share on Class A and Class B common stock, which will be paid on April 1, 2011, to stockholders of record as on March 9, 2011.
Fetzer Vineyards Sale
Brown-Forman has agreed to sell its Hopland, California based wine asset, Fetzer Vineyards, to Vina Concha y Toro S.A., a Chilean wine producer for $238.0 million.
The sale includes its bottling facility, Fetzer wine, Fetzer brand and other California-based wines but excludes its super-premium Sonoma-Cutrer brand. Under the financial advisory of Rabo Securities USA Inc. management expects to close the deal by April 2011.
The deal will help Brown-Forman to concentrate on its best growth prospects. The company intends to focus on markets offering better prospects and higher returns.
Guidance and Zacks Consensus
Moving forward, Brown-Forman anticipates moderate improvement in global economic conditions and customer trends in fiscal 2011. Accordingly, the company increased its earnings guidance to a range of $3.35 to $3.45 per share from $3.18 and $3.42 per share for fiscal 2011. The Zacks Consensus Estimate for the year is currently pegged at $3.31 per share.
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.
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