Brown-Forman Raises Expectations After Banner Quarter

Brown-Forman  (NYSE: BF-A  ) (NYSE: BF-B  ) lifted its earnings expectations for fiscal year 2014 from $2.80-$3.00 to $2.95-$3.05 after a triumphant quarter. Just about every product except Southern Comfort saw at least single-digit revenue growth during the quarter, and many of the company's brands experienced double-digit increases.

Market leader Jack Daniel's increased its underlying sales 10%, with Tennessee Honey leaping 30% and Gentleman Jack climbing 15%. Sales of the Woodford Reserve group of whiskey's led a 16% increase across Brown-Forman's super-premium whiskey category, jumping 27% for the quarter.

Even Brown-Forman's white spirits joined the party as the Finlandia family of vodkas saw sales grow 9%.

Strength and resilience
Across the board, Brown-Forman's underlying net sales grew 7% year-to-date, while emerging market underlying sales gained 10%. Underlying operating income rose even higher with a 14% increase attributed to growing revenue, expanding margins and operating leverage.

CEO Paul Varga credited the "strength of the Jack Daniel's trademark, disciplined innovation, our favorable skew to outperforming categories and price points, and our limited exposure to some of the emerging markets that have decelerated," as the key drivers of Brown-Forman's successful quarter. He cited the company's "strength and resilience" as the reason for the raised expectations for "low double-digit growth in underlying operating income and diluted earnings per share of $2.95-$3.05."

Bucking the trend
On Jan. 30 of this year, leading distiller Diageo (NYSE: DEO  ) reported net sales growth of only 1.3%, largely due to an alarming 22% drop in total sales in China over the prior six months. Pernod Ricard (NASDAQOTH: PDRDY  ) , the second leading spirit maker, also saw its first-half sales drop 18% in China while Remy Cointreau's Cognac sales plunged 32%. Generally, the crackdown on giving gifts to Chinese officials and other anti-corruption measures were blamed for the slowdown.

However, Brown-Forman bucked the trend. The company grew its net sales in China by double digits. It also saw double-digit growth in Brazil, Russia, Thailand, Turkey, India, and the CIS countries.

Converging trends
According to the Distilled Spirits Council of the U.S. (DISCUS), premium bourbon and Tennessee whiskey sales drove American spirits exports to record-setting heights in 2013. Exports reached $1.5 billion, including $1 billion in bourbon and Tennessee whiskey exports. This was a 5% increase over 2012 exports of nearly $957 million.

This, coupled with the growth of premiumisation, set the stage for Brown-Forman's impressive quarter of net sales growth for its super-premium whiskey brands. This was especially true of the Woodford Reserve family, which jumped 27%. According to DISCUS, the price segments for premium (1.6%), high end (7.2%), and super-premium (6.3%) American spirits grew in volume during 2013, while the value segment dropped 1.2%.

Diageo also saw its super and ultra-premium brands increase 18.5% during the previous six months. Premiumisation appears to be a trend that is here to stay and will continue despite the issues in China. 

Flavor trend
The flavor trend is also taking the whiskey world by storm and Brown-Forman's trademark brand, Jack Daniel's, is enjoying sweet rewards with its innovative offering of Tennessee Honey. It grew 30% overall, including double-digit expansion in the U.S. Jack's flavored whiskey is just scratching the surface of demand worldwide and has generated so much buzz that Brown-Forman wasn't able to meet all of the international demand for it in 2013, according to Jack Robertiello of The Beverage Information Group.

A Fool's summary
To sum it up, Brown-Forman is on a roll and appears to have momentum across the globe, especially in China. This is momentum that the big boys, Diageo and Pernod Ricard, have recently lost. Add this to the company's growing sales, widening margins, and the gains of Jack Daniel's and its extensions Tennessee Honey and Gentleman Jack, and you've got a recipe for success over the final quarter of the 2014 fiscal year and beyond.

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