Brown-Forman posts higher earnings in fiscal 2nd quarter

FILE - In this Dec. 5, 2011, file photo, bottles of Jack Daniels Tennessee Whiskey line the shelves of a liquor outlet in Montpelier, Vt. Spirits maker Brown-Forman Corp. on Wednesday, Dec. 5, 2018, reported fiscal second-quarter net income of $249 The Associated Press
FILE - In this Dec. 5, 2011, file photo, bottles of Jack Daniel's Tennessee Whiskey line the shelves of a liquor outlet in Montpelier, Vt. Spirits maker Brown-Forman Corp. on Wednesday, Dec. 5, 2018, reported fiscal second-quarter net income of $249 million. (AP Photo/Toby Talbot, File)

Liquor company Brown-Forman Corp. reported slightly higher second-quarter net income Wednesday on the strength of its American whiskey and tequila sales, but cautioned that it's starting to feel the pinch from tariffs slapped on its spirits in key European markets.

The Louisville, Kentucky-based company — best known for its Jack Daniel's Tennessee Whiskey brand — said tariff-related inventory reductions were mostly to blame in shaving an estimated 2 percentage points off its underlying net sales growth in the three-month period.

American spirits producers hit by the tariffs face the choice of either passing along the tax to European customers and risk losing market share, or absorbing tariff-related costs, which can mean smaller profits.

So far, Brown-Forman has mostly opted to absorb the costs to secure sales momentum during the crucial holiday season, but it has raised the price of its whiskeys in a handful of markets, its top executives said in a conference call Wednesday with industry analysts.

"But as we move farther into the fiscal year and into the summertime, we're going to be more motivated to recoup at least a portion of these tariff costs," said Chief Operating Officer Lawson Whiting, the company's incoming CEO. "And we're starting those conversations now."

The tariff-related drag in the second quarter didn't exceed Brown-Forman's projections, said Jane Morreau, the company's chief financial officer.

As for the company's tariff-related pricing strategy going forward, she said: "We continue to assess the timing and the amount of additional prices increases on a market-by-market basis, but we do not expect that additional increases would offset the cost of the tariffs."

Foreign markets account for slightly more than half of Brown-Forman's overall sales. EU countries represent slightly more than one-fourth of total sales.

Brown-Forman, like other large spirits companies, stockpiled inventories in bracing for the effects of tariffs imposed in the European Union that targeted American whiskey and other U.S. products in response to President Donald Trump's decision to impose tariffs on European steel and aluminum. In the first quarter, Brown-Forman estimated stockpiling contributed about two to three points of its underlying net sales growth.

On Wednesday, Brown-Forman maintained its full fiscal-year earnings projection of $1.65 to $1.75 per share on projected underlying net sales growth of 6 percent to 7 percent. The earnings prediction assumes tariffs will remain in place the full fiscal year, it said.

For the first half of its fiscal year, underlying net sales in developed international markets grew by 5 percent, driven mainly by volume gains, the company said. But the tariff-related stockpiling momentum from the first quarter largely evaporated in the second quarter.

"As anticipated, the developed international markets, and more specifically Europe, experienced substantial giveback during the second quarter associated with the first quarter's wholesale and retail level tariff-related buy-ins, effectively reversing the incremental benefit from the first quarter," Brown-Forman said in its earnings release.

In the U.S., underlying net sales grew by 3 percent in the first six months of the fiscal year, Brown-Forman said.

Its Woodford Reserve bourbon brand was the biggest contributor to U.S. sales growth. Another growing bourbon brand, Old Forester, also posted a strong second-quarter performance, and Jack Daniel's Tennessee Whiskey sales in the U.S. also accelerated in the quarter, it said.

Emerging overseas markets posted another round of strong growth in underlying net sales, the company said.

Brown-Forman reported net income of $249 million, or 52 cents per share, for the quarter ended Oct. 31. That's compared to $239 million, or 49 cents per share, a year ago. Quarterly net sales were essentially flat at $910 million.

Brown-Forman shares have fallen 12 percent since the beginning of the year. The stock has declined 5 percent in the last 12 months.

Among its brands, the entire Jack Daniel's lineup had underlying net sales growth of 5 percent for the first six months of the fiscal year, the company said. It reported 25 percent underlying net sales growth for Woodford Reserve. Among its tequilas, Herradura was up 15 percent and el Jimador rose 11 percent.

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A portion of this story was generated by Automated Insights ( http://automatedinsights.com/ap ) using data from Zacks Investment Research. Access a Zacks stock report on BF.A at https://www.zacks.com/ap/BF.A

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