Brown-Forman, the company behind Jack Daniel's and a whole shelf of other whiskeys, had a bit of a mixed bag quarter. Sales came in lighter than Wall Street expected, but the stock still climbed. Why? Because the parts of the business that are growing are growing fast, and the company's margins are looking healthier than they have in a while.
Shares of Brown-Forman (BF.B) and Brown-Forman (BF.A) were up about 4% on Wednesday, even as the company reported fiscal first-quarter earnings that missed on both the top and bottom lines. Sometimes the market looks past the headline numbers, and this seems like one of those days.
There's also a leadership transition in the works. CEO Lawson Whiting, who has spent nearly three decades at the company, plans to retire once the board finds his replacement. The search is on, and it includes both internal and external candidates. That kind of news can make investors nervous, but the stock's reaction suggests they're taking it in stride.
The Numbers: A Miss, but Not a Disaster
For the quarter, Brown-Forman reported diluted earnings of 38 cents per share, just shy of the 39 cents analysts were looking for. Sales fell 1% to $911 million, below the $933.02 million consensus. Organic sales also dipped 1%.
But here's where it gets interesting. Operating income dropped 3% to $252 million, yet on an organic basis, it actually rose 4%. Gross margin expanded by 40 basis points to 60.2%, helped by lower costs and a more favorable product mix. That's the kind of efficiency that gets investors excited.
Cash flow was solid too, with operating cash flow at $173 million and free cash flow at $161 million.
So what dragged sales down? A few things. The end of the Korbel relationship (that was their sparkling wine distribution deal) hurt. Lower sales of used barrels, which they sell to other spirits makers, also weighed on revenue. And tequila, which had been a growth driver, is now cooling off. But those headwinds were partly offset by strong growth in ready-to-drink products, which are those canned cocktails and premixed drinks that have become so popular.
The Used Barrel Problem
One of the more interesting tidbits from the earnings call was about used barrels. Brown-Forman sells its used bourbon barrels to Scotch and Irish whiskey producers, who use them to age their own spirits. But demand for those barrels has been weak, and it's taking a toll on the company's non-branded and bulk business. Organic sales in that segment have plunged more than 60% over two years, from over $100 million to about $30 million. That's a significant drop, and it's not something that's going to turn around overnight.
Ready-to-Drink Is the Star
While whiskey sales were flat overall, there were some bright spots within the category. The international rollout of Jack Daniel's Tennessee Blackberry is going well, offsetting declines in Tennessee Honey and Gentleman Jack. But the real growth story is in ready-to-drink (RTD) products. Sales in that category jumped 20%, or 11% organically. And New Mix, which is a big brand in Mexico, saw sales surge 48%, or 36% organically, thanks to strong demand in its home market and a successful U.S. launch.
Tequila, on the other hand, is struggling. Sales fell 12%, or 13% organically. Herradura dropped 17%, and El Jimador declined 10%. That's a notable reversal for a category that was once the toast of the spirits world.
Regional Breakdown: Emerging Markets Shine
Geographically, the picture is mixed. U.S. sales declined 3% but were flat organically, with the Korbel wind-down and lower distributor inventories dragging down reported numbers. Developed international markets fell 6%, or 8% organically, as Jack Daniel's Tennessee Whiskey volumes weakened in Germany, France, and Spain.
But emerging markets were a different story. Sales there rose 11%, or 9% organically, led by Mexico and double-digit growth for New Mix. Travel retail, which includes duty-free shops, declined 1%, with geopolitical pressures in the Middle East hurting that channel.
Blackberry Expansion Continues
Brown-Forman is doubling down on the Jack Daniel's Tennessee Blackberry franchise, which is now available in more than 30 international markets. It's seeing strong growth in Brazil, France, and the United Arab Emirates. And the company is expanding the line with new products, including Jack Daniel's Tennessee Blackberry and Lemonade in a ready-to-drink format. That's a smart move, given how well RTD products are performing.
What's Ahead: A Margin Squeeze?
Here's the cautionary note. During the earnings call, management warned that the first-quarter gross margin of 60.2% might be the high point for fiscal 2027. They're expecting higher-cost whiskey inventory, rising commodity expenses, and lower production volumes to put pressure on margins for the rest of the year. That's not exactly a rosy outlook, but it's also not a surprise given the inflationary environment.
The company reaffirmed its full-year guidance, which calls for organic sales to remain roughly flat. It's also sticking with its forecast for a 3% to 5% decline in organic operating income, though management expressed more confidence that results would land near the stronger end of that range. That's a subtle but positive shift in tone.
Capital spending is expected to be between $60 million and $70 million, which is well below recent levels. That suggests the company is being disciplined with its cash, which is generally a good thing for shareholders.
At the time of publication, Brown-Forman shares were trading at $28.11, up 4.07% on the day. Investors seem to be focusing on the margin expansion and the strength in RTD, rather than the sales miss. And with a CEO transition on the horizon, there's plenty to watch in the coming months.
