Brown-Forman delivers double-digit growth despite challenges

Supply chain issues for Brown-Forman and uncertainty in Europe have dominated the spirits giant’s announcement of its financial results for the third quarter and the nine months ending January 31, 2022.

For the third quarter, the company’s reported net sales of $1,037 million increased 14% (+22% on an organic basis) compared to the same prior-year period. For the first nine months of the fiscal year, the company’s reported net sales increased 11% to $2,937 million (+14% on an organic basis) compared to the same prior-year period. Year-to-date reported operating income decreased 4% to $958 million (+19% on an organic basis) and diluted earnings per share declined 12% to $1.43, primarily due to the gain from the sale of the Canadian Mist, Early Times, and Collingwood brands in the prior fiscal year.

Lawson Whiting, Brown-Forman’s President and Chief Executive Officer said: “Brown-Forman’s business remained strong as we delivered double-digit net sales growth year-to-date, even amid significant supply chain constraints, most notably glass supply.” He added, “The agility and resilience of our people, backed by the increased demand for our brands, allowed us to build on the momentum from the first half of the year to deliver a strong third quarter. We believe our accelerated rate of growth keeps us on track to deliver high quality results for fiscal 2022.”

Brown-Forman prioritises Jack Daniel’s

The Jack Daniel’s family of brands grew reported net sales 12% (+14% organic) powered by 17% reported net sales growth (+20% organic) from Jack Daniel’s Tennessee Whiskey.

Additionally, the continued international launch of Jack Daniel’s Tennessee Apple and strong consumer demand for Jack Daniel’s RTDs were significant contributors to growth. Supply chain disruptions adversely impacted the results for Jack Daniel’s Tennessee Whiskey, Jack Daniel’s Tennessee Honey, Jack Daniel’s Tennessee Fire, and Gentleman Jack during the first nine months of the fiscal year.

Whiting said: “As a reminder, last quarter, we shared that we had prioritized Jack Daniel’s Tennessee Whiskey, as we navigated the supply chain challenges. You can see that prioritisation in the results as they demonstrate the strong and consumer demand for the brand, particularly in the on premise, as well as our focus on rebuilding inventories across the supply chain. Given the size of the brand, this growth is particularly impressive, adding almost 1.6 million nine litre cases compared to the same period last year.”

CFO Leanne Cunningham added: “Jack Daniels RTDs delivered double digit organic sales growth as we continue to experience strong volume growth in Germany, where the brand sustained its momentum and remains a category leader. And even with Australia lapping strong prior year comparison, it continues to contribute to our growth.”

Premium bourbons, led by Woodford Reserve and Old Forester, grew reported net sales 10%.

The tequila portfolio grew reported net sales 19%, driven by double-digit growth from Herradura and el Jimador.

“Finally, our portfolio of super-premium brands continues to benefit from the consumer premiumization trends as well as our investment behind our emerging brands teams,” Whiting said. “Brands, such as Old Forester, Chambord, our single malt scotches GlenDronach, Benriach and Glenglassaugh as well as Fords Gin have also benefited from the reopening in the on-premise, particularly in the US where this channel is an important part of our brand building model.”

Glass shortage hits spirits producers

The US glass bottle market is running into a supply shortage caused by high demand for alcohol, raw materials being reallocated to produce COVID-19 vaccine vials and supply chain disruptions arising from the shipping container crisis. The situation is exacerbated by the fact that only 31% of glass bottles in the US are recycled.

Brown-Forman said the glass shortage was its largest driver of supply chain disruptions in the third quarter.

“We continue to face challenges from supply chain disruptions, largely related to glass supply,” Whiting said. “These disruptions reduced our finished goods inventories along with the inventories of both the distributor and retailer levels, while we are seeing some signs of improvement that supply chain challenges negatively impacted our our net sales and increase our costs in the year to date performance.”

The situation in Russia

Whiting said Russia is a top 10 market for Brown-Forman and is 1% of its business worldwide. Currently, Brown-Forman sells its spirits and wine through third-party sellers in Russia. The company did not comment on whether it would stop sales in the country during the current crisis.

Whiting said Brown-Forman was most concerned with its staff working in Russia and Ukraine.

“We do know they’re all safe right now, but it is certainly a very, very difficult and volatile situation,” he said. “It’s scary, it’s sad. It’s exhausting for the employees and we’re trying to do what we can from here.

“We’re committing financial assistance, not only to our employees, but to some of the big organisations that are trying to help out.”

He also revealed a story he found touching, saying that Brown-Forman employees that live in Poland and Romanian and Hungary have gone to the border of Ukraine and met their fleeing counterparts at the fences.

“Our employees picked them up and took them to their houses and are taking care of them now,” he said.

“So it’s been a growing market for us that has obviously going to be greatly disrupted,” he said. “We have about 80 odd employees there now. We were hiring a lot more than that with the intent to go live in July. We’ve stalled that or paused it. We’ve paused on the recruiting there and at this point we’re just waiting to see. We’re going to have to evaluate the situation. It’s only been a week. So we don’t really have a lot more information to share on it right now, but know that we’re doing everything we can.”

The outlook for Brown-Forman

Brown-Forman noted that is strong year-to-date performance and consumer demand along with supply chain constraints continuing to ease, enabling some rebuild of inventory, it expected organic net sales growth of 11% to 13% for the full year.

“We project the costs associated with supply chain disruptions and inflationary cost headwinds will continue to have a negative impact on our gross margin, largely offset by a modest positive impact from the removal of tariffs in the EU,” the company said. “Therefore, we continue to expect reported gross margin to be flat or slightly down for the full year compared to fiscal 2021.

“We expect our organic operating expenses, which include advertising and SG&A, to increase in the 7% to 9% range. We anticipate organic advertising expense to be slightly below our organic net sales growth.

“Based on the above expectations, we anticipate organic income growth of 12% to 16% for the full year.”

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