Brown-Forman Sleeps Off its Hangover, Charges to a New High

When bars and restaurants closed at the peak of the pandemic shares of wine and spirits producer Brown-Forman (NYSE:BF.B) got hammered. But the maker of Jack Daniels and other popular alcoholic beverage brands has since picked itself off the ground and rallied to an all-time high.

Although economies around the world have reopened, plenty of restrictions around indoor capacity and large gatherings remain in place. Therefore, it may seem odd to investors that this type of stock has rebounded so quickly. Is the cart now ahead of the horse?

As Brown Forman gets ready to report earnings this week, let's take a look at what's been keeping the company sober and what highlights to expect.

Why is Brown Forman Going Up?

So yes, the pandemic has had a major impact on Brown Forman's sales, but there have been a couple bright spots. Last quarter the company reported mixed results with sales outpacing the consensus and earnings falling a penny short. Sales declined 5% and earnings fell 20%.

The U.S. segment, Brown Forman's largest market, was one of the bright spots. Despite the pandemic effects kicking in during the latter part of the quarter some favorable trends unfolded. People that couldn't go to their local watering hole resorted to drinking at home. There was also a "pantry loading" effect like what we saw with essential food products.

In addition to strength in the off-premise channel, like many businesses, there has been a shift towards online consumption. Brown Forman's e-premise segment has also picked up the tab.

At the product level, bourbon has been a standout performer. The increasing popularity of "dark" liquors drove bourbon sales up 21% last quarter. This is a trend that was developing prior to the pandemic and is likely to persist. Jack Daniel's Tennessee Apple, launched in the fall of last year, has also been a hit.

Another major development has been the company's strategic shift away from non-core brands. It has been shedding several brands to focus on its premium offerings. In early August, it completed the sale of the Early Times, Canadian Mist, and Collingwood brands to privately held distiller Sazerac. The move towards a premium-centric portfolio bodes well for margin expansion.

On the flipside, Brown Forman's on-premise business which accounts for around 20% of global sales, has suffered. This segment along with the travel retail channel were abruptly halted at the height of the crisis. International markets have also not fared as well.

What Should Investors Expect When Brown Forman Reports?

Brown Forman is scheduled to report fiscal 2021 first-quarter earnings before the market open on September 2^nd. It has faced multiple headwinds over the last few months. After an initial rebound, economic conditions have weakened. Consumer confidence fell to its lowest level since 2014 in July.

With U.S. unemployment still at elevated levels and the second wave of stimulus yet to come through, premium whiskey may have worked its way out of the budget for some people. Meanwhile, government restrictions on large gatherings suggest any drinking that's been going on has been on a small scale. And you have to wonder if the pantry loading of Q4 will be followed by reduced purchases in Q1.

Brown Forman also has significant exposure to emerging markets which account for nearly one-fifth of sales. Many developing economies have been especially hard hit by the pandemic. Workers in many industries have been laid off. Weakened purchasing power has likely impacted the affordability of premium liquor products. Sales in Mexico, Brown Forman's largest emerging market exposure, were slowing before the pandemic and likely to have gotten much worse since.

In the positive column is strength in the domestic market. The National Alcohol Beverage Association reported that industry-wide sales of nine-liter spirit case increased 13% in June following weak April and May sales. Meanwhile, U.S. personal income rose 0.4% and spending rose 1.9% in July.

Overall, we are probably going to hear a lot of "tale of two quarters" type commentary from the company - a weak start that built up to a strong finish. U.S. sales were good, but international sales were weak. Off-premise and online strength was offset by weakness elsewhere. Whether the strengths outweigh the weaknesses is anyone's guess.

Is Brown Forman a Buy?

The Q1 consensus expectations are for a 9% revenue decline and EPS of $0.31. The company may eke out a slightly better earnings result depending on if the late quarter strength offset the early quarter weakness. With many places still closed and large gatherings restricted, reduced promotional activity and advertising expenses could also drive a better than expected bottom line.

Back on July 17^th, Brown Forman's chart formed an ascending continuation triangle pattern. The pattern showed that buyers have been more aggressive than sellers and suggest the uptrend that began in early 2019 may resume. If it does the stock may climb to the $91 to $97 range by the end of the calendar year.

But don't expect anything earth-shattering this quarter. If the company falls even a penny or two short of the Street, it could very well lead to a sizeable downward move in the stock given how much recovery optimism is built in. Investors looking to put money to work may want to wait for a pullback and consider some other opportunities.