Fortune Brands Inc.‘s (FO) adjusted earnings of 71 cents a share for the second quarter of fiscal 2011 missed the Zacks Consensus Estimate of 97 cents and declined 5.1% from the prior-year quarter. Earnings, on a GAAP basis, were 65 cents per share compared with $1.17 per share posted in the year-ago quarter.
Quarterly Details
Net sales during the reported quarter grew 5.5% year over year to $1,592.4 million, but fell short of the Zacks Consensus Estimate of $1,926.0 million. Fortune Brands’ adjusted operating income declined 9.9% to $187.5 million and operating margin accordingly decreased by 200 basis points to 11.8%.
Fortune Brands’ Beam Spirit business outperformed in its three key markets. During the quarter, net sales of the company’s spirit business grew by 11.3 to $702.7 million. However, operating income upped 0.5% to $146.7 million.
Net sales from the company’s Home & Security business reported a growth of 1.3% to $889.7 million. The softer growth in the segment was primarily due to tougher comparison growth in the year-ago quarter.
Moreover, Fortune Brands’ operating income plunged 14.8% from the prior-year quarter to $70.4 million primarily due to higher commodities costs and increased investments in brand-building initiatives and new businesses.
At the end of the quarter, Fortune Brands had cash and cash equivalents of $287.4 million and long-term debt of $3,290.1 million compared with a cash balance of $416.3 million and long-term debt of $3,580.6 million in the prior-year quarter.
During the quarter, the company generated a free cash flow of $155.8 million compared with $326.8 million in the prior-year quarter.
Guidance
The company expects to sustain its growth momentum into fiscal year 2011. Fortune Brands anticipates that fiscal 2011 will be a solid year for the company despite higher commodity costs and investments to support long-term growth.
Business Restructuring
Recently, Fortune Brands announced its intention to split the company into three standalone units, giving investors pure plays in golf, home products and alcoholic drinks. After the separation, the ongoing company will be re-named as Beam Inc.
The company’s home products business will retain its name of Fortune Brands Home & Security. Moreover, the company revealed that it is planning to spin-off its home and security business to shareholders in a tax-free transaction by the end of fourth-quarter 2011.
Consequent to the spin-off, the company will continue to subsist as a publicly traded manufacturer of distilled spirit. This unit has parented brands like Jim Beam bourbon, Courvoisier cognac and Sauza tequila. Fortune Brands looks forward to pull off this strategic restructuring within the next several months.
Besides, the company faces intense competition from well-established players in the market, such as Diageo plc (DEO) and Brown-Forman Corporation (BF.B) in its spirits business and Masco Corporation (MAS) in its home and hardware business. Further, global competitive conditions have also been intensified. Consequently, risk associated with operating in such a competitive environment may undermine the company’s future operating performance.
Currently, Fortune Brands has a Zacks #4 Rank, implying a short-term Sell rating on the stock. Besides, the company retains a long-term Neutral recommendation.
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