Brown-Forman Corporation (NYSE: BFA, BFB) reported financial results for its third quarter and nine months ended January 31, 2023. For the third quarter, reported net sales increased 4% to $1.1 billion (+5% on an organic basis²) compared to the same prior-year period.

Reported operating income decreased 50% to $173 million (-11% on an organic basis) reflecting lower gross margin, a non-cash impairment charge of $96 million for the Finlandia brand name, and higher operating expenses including certain post-closing costs and expenses in connection with the acquisitions of Diplomático and Gin Mare. Diluted earnings per share decreased 61% to $0.21 in the quarter, driven primarily by the decrease in reported operating income and a $27 million pension settlement charge.

For the first nine months of the fiscal year, reported net sales increased 8% to $3.2 billion (+12% on an organic basis) compared to the same prior-year period. In the first nine months, reported operating income decreased 13% to $829 million (+9% on an organic basis) due to the items mentioned above. Diluted earnings per share decreased 16% to $1.20 due to the decrease in reported operating income and a $27 million pension settlement charge.

“Brown-Forman continues to deliver strong net sales growth year-to-date, as we executed our strategic priorities and invested boldly behind our brands and our people,” Lawson Whiting, Brown-Forman’s President and Chief Executive Officer said in a news release. “Even as trends begin to normalize, we believe our business will remain robust given the premiumization of our portfolio, the health of our brands, and the resolve of our people. We also believe our long-term perspective enables us to navigate the changes of our world and drive consistent, reliable growth year after year.”

Year-to-Date Fiscal 2023 Highlights

The company delivered broad-based reported net sales growth across all geographic clusters and the Travel Retail channel driven by strong consumer demand and the continued rebuilding of distributor inventories.

Portfolio growth was led by:

• Jack Daniel’s Tennessee Whiskey with reported net sales growth of 6% (+12% organic).
• Continued very strong double-digit growth of Woodford Reserve as reported net sales increased 34% (+35% organic).
• Ready-to-Drinks³ (RTDs) with double-digit reported net sales growth of 12% (+15% organic) fueled by New Mix and Jack Daniel’s RTDs.
• Reported gross margin contracted 170 basis points driven by inflation, supply chain disruption costs, and foreign exchange, partially offset by favorable price/mix and the removal of tariffs.
• Reported advertising expense increased by 20% (+24% organic).

Year-to-Date Fiscal 2023 Brand Results

• The Jack Daniel’s family of brands reported net sales growth of 5% (+11% organic) was driven by Jack Daniel’s Tennessee Whiskey in international markets and the Travel Retail channel. Higher pricing and an estimated net increase in distributor inventories in certain emerging and developed international markets positively impacted reported net sales, partially offset by lower volumes in the United States due in part to an estimated net decrease in distributor inventories. Continued consumer desire for convenience and flavor drove gains in Jack Daniel’s RTDs, Jack Daniel’s Tennessee Fire, and Jack Daniel’s Tennessee Honey. In addition, reported net sales also benefited from the launch of the brand’s new Jack Daniel’s Bonded.
• Premium bourbons, propelled by very strong double-digit net sales growth from Woodford Reserve and Old Forester, delivered 33% reported net sales growth (+34% organic) driven by stronger consumer demand in the United States, partially due to the estimated net increase in distributor inventories.
• Ready-to-Drinks (RTDs) growth was driven by consumer preference for convenience and flavor. New Mix gained market share in Mexico as reported net sales grew 45% (+41% organic), fueled by higher volumes and prices. Jack Daniel’s RTDs/Ready-to-Pours (RTPs) grew reported net sales 6% (+10% organic) led by Australia and Germany.
• Reported net sales for the tequila portfolio increased 12% (+11% organic) with el Jimador and Herradura both delivering double-digit reported net sales growth. el Jimador grew reported net sales 18% (+19% organic) led by growth in the United States and Mexico. Herradura increased reported net sales 10% (+9% organic) driven by volumetric growth in the United States, partially due to an estimated net increase in distributor inventories, and higher pricing in Mexico.

Year-to-Date Fiscal 2023 Market Results

• Reported net sales growth was broad-based across all geographic clusters and the Travel Retail channel reflecting the strength of the brand portfolio, strong consumer demand, and the continued rebuilding of distributor inventories. This rebuilding of distributor inventories reflects the easing of supply chain constraints compared to the same period last year.
• Emerging markets’ reported net sales increased 18% (+26% organic) led by the growth of Jack Daniel’s Tennessee Whiskey in Brazil and United Arab Emirates, and continued double-digit growth in Mexico fueled by New Mix.
• As trends began to normalize, reported net sales in the United States grew 4% (+4% organic). This growth was driven by higher volumes of Woodford Reserve, partially reflecting an estimated net increase in distributor inventories, and higher prices across the portfolio led by the Jack Daniel’s family of brands. Lower volumes of Jack Daniel’s Tennessee Whiskey and Korbel California Champagne partially offset the growth due to an estimated net decrease in distributor inventories.
• Developed International markets’ reported net sales increased 5% (+13% organic) due to volumetric growth and higher pricing from Jack Daniel’s Tennessee Whiskey and volumetric growth of Jack Daniel’s RTDs. Reported net sales growth in Developed International markets was led by Italy, Korea, and Belgium.
• The Travel Retail channel sustained strong growth with a reported net sales increase of 48% (+52% organic) driven by higher volumes across much of the portfolio as travel continued to rebound.

Year-to-Date Fiscal 2023 Other P&L Items

• Reported gross profit increased 5% (+11% organic). Gross margin contracted 170 basis points to 58.4%, driven by the impact of inflation on input costs, costs related to supply chain disruptions, and the negative effect of foreign exchange. These declines were partially offset by favorable price/mix and the removal of EU and U.K. tariffs on American whiskey.
• Reported advertising expense grew 20% (+24% organic) driven by increased investment to support Jack Daniel’s Tennessee Whiskey, Woodford Reserve, the launch of Jack Daniel’s Bonded, and Herradura in the United States. Reported selling, general, and administrative expenses increased 9% (+11% organic), largely driven by higher compensation-related expenses, higher discretionary spend, and costs related to the acquisition and integration of the Gin Mare and Diplomático brands.
• During the third quarter, a non-cash impairment charge of $96 million was recognized for the Finlandia brand name, largely due to macroeconomic conditions including rising interest rates and increasing costs. The company also incurred transaction expenses of $42 million related to the termination of certain distribution contracts in connection with the acquisitions of Diplomático and Gin Mare. 
• The company’s reported operating income decreased by 13% (+9% organic). 
• Earnings per share decreased 16% to $1.20 driven primarily by the decrease in reported operating income and a $27 million pension settlement charge.

Year-to-Date Fiscal 2023 Financial Stewardship

On January 24, 2023, the Brown-Forman Board of Directors declared a regular quarterly cash dividend of $0.2055 per share on its Class A and Class B common stock. The dividend is payable on April 3, 2023, to stockholders of record on March 8, 2023. Brown-Forman has paid regular quarterly cash dividends for 79 consecutive years and has increased the regular cash dividend for 39 consecutive years.

Fiscal 2023 Outlook

The company anticipates strong growth in fiscal 2023 despite global macroeconomic volatility and geopolitical uncertainties. The rebuilding of finished goods inventories, due to the easing of supply chain constraints, positively impacted results during the first nine months of fiscal 2023. For the full year, the effect of the estimated net change in distributor inventories could range from no impact to a moderate unfavorable impact on results as the company laps significant inventory rebuilding during the fourth quarter of fiscal 2022. Accordingly, the company updates guidance for fiscal 2023 and expects the following, assuming that there will be no impact from an estimated net change in distributor inventories for the full year:

• Reflecting the continued strength of our portfolio of brands, strong consumer demand, and the return of inventories to more normalized levels, we now to expect organic net sales growth in the 8% to 10% range. 
• For the full year, we continue to expect reported gross margin to be consistent with the first half of fiscal 2023.
• Based on the above expectations, we continue to anticipate high-single digit organic operating income growth.
• We continue to expect our fiscal 2023 effective tax rate to be in the range of approximately 22% to 23%. 
• Capital expenditures are planned to be in the range of $190 to $210 million.

For more information about the company, please visit brown-forman.com.