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Tariffs a Key Risk for Jack Daniel's Maker Brown-Forman

Sonia Vora

Sonia Vora: Wide-moat Brown-Forman's fiscal 2018 results largely came in line with our expectations, with net sales up 8% and gross margin expanding 30 basis points to nearly 68%, resulting in diluted earnings per share of $1.48, which is comparable to our $1.50 estimate. We're maintaining our longer-term outlook, which calls for above 5% net sales growth and mid-30s average operating margin over our forecast. Despite a mid-single digit pullback in shares following the release, we'd suggest investors wait for a more attractive entry point.

Price and mix contributed around a third of the firm's underlying sales growth, consistent with our outlook for around 2% annual improvement in pricing over our forecast, as we expect a greater contribution from the firm's super-premium American whiskey portfolio (which grew underlying sales by 15% this year) will yield positive mix effects. The Jack Daniel's brand family, which accounted for roughly 60% of annual depletions, also remains healthy, with underlying net sales up 6%.

The potential for retaliatory tariffs on American spirits from Europe and Mexico (which are not included in management's fiscal 2019 outlook) remains a key risk facing the firm in the near term, as we estimate these regions account for around one third of sales when combined. We haven't incorporated potential tariffs into our projections, given the considerable uncertainty around the likelihood and impact of such measures, but plan to keep a close eye on management's response to the situation, which could include building inventory levels in markets where it owns distribution.