Brown-Forman Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, three months ended July 31, 2023; compared with the three months ended July 31, 2022. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q1 FY2024 | Prior-year quarter | Change |
|---|---|---|---|
| Sales before excise taxes | $1,326 million | $1,288 million | +3% |
| Net sales | $1,038 million | $1,007 million | +3% reported; +2% organic |
| Gross profit / margin | $651 million / 62.7% | $622 million / 61.8% | Profit +5%; margin +0.9 percentage points |
| Operating income / margin | $327 million / 31.5% | $343 million / 34.0% | Income -4%; margin -2.5 percentage points |
| Net income | $231 million | $249 million | -7% |
| Diluted EPS | $0.48 | $0.52 | -7% |
| Cash from operations | $38 million | $173 million | Down $135 million |
Net sales growth reflected favorable price/mix and the Gin Mare and Diplomático acquisitions, partly offset by lower volumes and foreign exchange. Organic net sales rose 2%, with volume down 4% and price/mix up 6%. Gross-margin improvement reflected pricing, lower supply-chain disruption costs, and lower tariff-related costs, partly offset by input-cost inflation and foreign exchange. Operating expenses increased 16% to $324 million, including higher advertising, compensation-related, and discretionary spending. Interest expense rose to $29 million from $19 million; the effective tax rate was 22.9%, versus 23.6%.
Markets and products
- U.S. net sales declined 8% reported and 9% organically, which management attributed in part to an estimated distributor-inventory reduction and comparison with a prior-year inventory rebuild.
- Emerging-market net sales increased 27% reported and 32% organically; developed international sales increased 5% reported but were flat organically. Travel Retail rose 13% reported and 9% organically.
- Reported category results included Ready-to-Drink up 9%, tequila up 15%, and Rest of Portfolio up 97% (primarily acquisitions). Whiskey declined 1%, wine declined 12%, and Finlandia vodka increased 13%.
- Brand trends were mixed: New Mix grew 52% reported, el Jimador 27%, and Jack Daniel’s Tennessee Apple 49%; Woodford Reserve declined 9% and Gentleman Jack 16%.
Cash, debt, and liquidity
- At July 31, 2023, cash and cash equivalents were $426 million, versus $374 million at April 30, 2023. Approximately 43% of cash was held by foreign subsidiaries and expected to be reinvested indefinitely outside the United States.
- Short-term borrowings were $389 million and long-term debt was $2,687 million, for total reported borrowings of approximately $3.08 billion. At April 30, total borrowings were approximately $2.91 billion. Commercial paper outstanding was $390 million at a 5.29% average interest rate.
- The company has a $900 million commercial-paper program supported by a $900 million bank credit facility expiring May 26, 2028, and reported investment-grade ratings of A1 from Moody’s and A- from S&P.
- Operating cash flow fell mainly because inventory investment increased by $227 million, reflecting higher input costs and inventory rebuilding. Capital expenditures were $49 million; dividends paid were $99 million.
Material changes, outlook, and other items
- Management reiterated fiscal 2024 guidance: organic net sales growth of 5%–7%, organic operating income growth of 6%–8%, an effective tax rate of approximately 21%–23%, and capital expenditures of $250–$270 million. Management expects growth trends to normalize after two years of double-digit organic net sales growth; continued input-cost pressure is expected to be partly offset by lower supply-chain disruption costs.
- Brown-Forman agreed to sell its Finlandia vodka business to Coca-Cola HBC for $220 million in cash, subject to working-capital and other adjustments. Closing was expected by December 31, 2023. The business was classified as held for sale; net assets had a carrying amount of $122 million at quarter-end.
- During the quarter, the company updated preliminary purchase-price allocations for its prior-year Gin Mare and Diplomático acquisitions. Their recorded goodwill was $306 million and $386 million, respectively; final valuations remained subject to revision.
- There were no material changes to the risk factors disclosed in the prior Form 10-K. The company cited risks including brand concentration, competition, distributor inventory and route-to-market changes, consumer demand shifts, input costs, foreign exchange, tariffs, regulation, and acquisition integration. It reported no material accrued loss contingencies and did not expect pending litigation to have a material adverse effect.
Important facts for investors to verify
- Whether the U.S. distributor-inventory decline reverses or persists, and how shipments compare with downstream consumer demand.
- Progress toward fiscal 2024 organic growth and margin guidance, given the quarter’s lower volumes, higher operating expenses, and reduced operating margin.
- Cash conversion and inventory levels, including the extent to which working-capital investment moderates in subsequent quarters.
- Completion and final proceeds from the Finlandia sale, including working-capital adjustments and use of proceeds.
- Acquisition performance and final purchase accounting for Gin Mare and Diplomático, including contingent consideration obligations.