Tariffs have long weighed on shares of whiskey distiller Brown-Forman (NYSE:BF.A) (NYSE:BF.B), which exports more than half of its spirits to international markets, led by its best-selling Jack Daniel's whiskey. In its most recently-reported quarter, net sales were flat at $910 million due to tariff-related inventory reductions. That followed a big sales increase in the first quarter of fiscal 2019, when customers were racing to stock up ahead of the imposition of retaliatory tariffs by Europe.
Concerns about further near-term tariff increases have eased. That has helped Brown-Forman's stock bounce about 10% off the lows it hit in January. Nevertheless, the damage may already be done for the distiller's fiscal third-quarter earnings, which will be released on Wednesday, March 6.
Here are four things investors should keep an eye out for in the report.
The tariff toll
U.S. whiskey exports jumped 28% in the first half of 2018 compared to the year before, according to the Distilled Spirits Council, but fell 8% year over year for the July through November period. In all, some $763 million worth of U.S. spirits exports are currently subject to tariffs.
Brown-Forman's then-incoming CEO Lawson Whiting warned in December that tariff-related pressures could hurt profits in the second half of fiscal 2019. The distiller has been "buying time" by not passing the tariffs' costs on to customers, in the hope that they would be short-lived. This will negatively impact gross margin in the short term.
However, it's clear that Brown-Forman will eventually have to take pricing actions that could hurt sales. Europe is among its most important markets, and the EU imposed tariffs of 25% on whiskey imports back in June 2018.
Although Brown-Forman sells most of its spirits overseas, the U.S. is the distiller's single largest market. In the first half of fiscal 2019, underlying net sales rose 3% year over year in the U.S. Because of the continued growth in popularity of whiskey -- and particularly premium and super-premium spirits -- the company's Woodford Reserve and Old Forrester brands enjoyed particular success. The former was the largest contributor to domestic sales growth during the first half of the year, delivering double-digit underlying net sales growth.
Jack Daniel's remains a leader, but it is under more competitive pressure, especially from Japan's Suntory, which has been lowering the price on its Jim Beam whiskey brand to drive sales growth.
Similarly, Diageo and Pernod Ricard are making substantial investments in their brands. The former is spending heavily on marketing its Johnnie Walker Scotch whisky, even opening its first retail store, while the latter is spending some $174 million to upgrade production facilities in Ireland for its leading Irish whiskey brand, Jameson.
The earnings impact
Brown-Forman cut its full-year earnings outlook after the first quarter, lowering its guidance to a range of $1.65 to $1.75 per share from its initial forecast of $1.75 to $1.85 per share, due to the tariffs, as well as foreign currency headwinds. It maintained that outlook after the second quarter.
Keep an eye on whether the ongoing impact of tariffs in foreign markets reduces management's confidence for the rest of the fiscal year.
Dividend should still be solid
Brown-Forman has paid regular quarterly cash dividends for 73 consecutive years and has increased its dividend for 35 consecutive years. Although tariffs and competition are taking a toll on sales and margins, this shouldn't affect the dividend.
Trade wars have few winners, and the collateral damage from waging such battles often impacts industries far removed from those initially targeted. The current strife is a perfect example. President Trump tried to make a point about steel and aluminum, but the EU retaliated against whiskey and motorcycles to have the greatest impact.
Brown-Forman obviously isn't immune to the repercussions, and investors should watch to see how large the ripples are and whether they'll begin to diminish with time.