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Jack Daniel’s distributor Brown-Forman Corp. is unlikely to beat earnings estimates when it reports fiscal second-quarter earnings on Thursday, after launching a promotional program for its flagship whiskey earlier this year, MKM said Tuesday.
The program offers an effective 2% discount on Jack Daniel’s, said MKM analyst Bill Kirk.
“It is rare for Jack Daniel’s, one of the strongest brands in consumer, to discount, especially when the larger U.S. Spirits industry is taking price,” Kirk wrote in a note to clients. “We believe this action will put pressure on fixed costs, making upside to the quarter unlikely.”
Adding to the downdraft, U.S. exports of whiskey were weak in the quarter which ends Oct. 31, with sales to Europe falling 28% from the year-earlier period, said Kirk.
“We believe this leads to excess domestic supply, which is partially behind the discounting seen locally by Jack Daniel’s,” said Kirk.
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The analyst is expecting Brown-Forman BF.B, -1.31% to post EPS of 52 cents, matching the FactSet consensus, but sales of $946 million, below the FactSet consensus of $974 million. A soft second quarter would likely put the company’s full-year guidance of EPS of $1.75 to $1.85 at risk, he wrote.
Brown-Forman has missed sales estimates for four straight quarters, but beaten EPS estimates for the past six.
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Kirk initiated coverage of Brown-Forman in September with a neutral rating and a $59 stock price target, that is about 21% below its current price. In that note, he wrote that he expects the company to continue to see mid single-digit growth thanks to strong absolute and relative pricing power in the U.S., “but with more risk than many investors had come to love.”
He cited a range of factors for his concerns, including the slump in exports to Europe ever since the imposition of 25% tariffs on whiskey. But long-term U.S. demographics are another challenge, as younger Americans drink less alcohol than previous generations and that trend is likely to continue as cannabis products—and legality—evolves and becomes more accessible.
Brown-Forman shares were down 1.4% Tuesday, but have gained about 40% in 2019, while the S&P 500 SPX, -0.94% has gained about 23%.
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