Brown-Forman-B

Brown-Forman posted a 1% sales decline to $911 million in its fiscal first quarter. Operating margin decreased 50 basis points to 27.7% as the timing of restructuring expenses and lower price/mix offset lower input costs and the end of the low-margin Korbel relationship.

Why it matters: We see signs that revenue should return to growth in fiscal 2027 even as consumer pressure remains stout. Excluding used barrel sales suggests alcohol sales were roughly flat, as recent innovations appear to be resonating. Ready-to-drink sales grew 11% organically, driven by New Mix, its canned cocktail brand using Brown-Forman's El Jimador tequila. Sales of Jack Daniel's Tennessee Blackberry (launched last year) offset declines in Honey and Gentleman Jack, leading to flat whiskey sales. Management is optimistic about a gradual recovery in US demand, citing incremental improvement since bottoming out last December/January. Separately, the drag from used barrel sales is poised to ease, having shrunk to about $30 million from $100 million in fiscal 2024.

The bottom line: We do not plan to materially change our $35 per share fair value estimate for wide-moat Brown-Forman. Shares rose 4% but trade more than 20% below our fair value estimate. We think the market underestimates an eventual recovery; we forecast mid-single-digit long-term sales growth. The firm maintained its full-year outlook for flat organic sales and a 3%-5% organic operating income decline. Management expressed confidence in the more favorable range of its operating income guidance, especially as cost-cutting efforts have outperformed expectations. We reiterate our High Uncertainty Rating, as we expect a gradual demand recovery given continued headwinds from a challenging macroeconomic environment and soft alcohol consumption in recent years. A quick, near-term catalyst for shares is unlikely.

We've lowered our fair value estimate to $35 per share from $37. The decrease stems from a 30-basis-point increase to our WACC. We now use a WACC of 7.5% (prior 7.2%), primarily reflecting our updated assessment of Brown-Forman's international exposure. Our intrinsic valuation implies 24 times fiscal 2027 earnings per share.

Brown-Forman posted 2% sales growth to $912 million in its fourth quarter, driven by a 2% organic sales rise. Operating margin decreased to 10.5% from 22.9%, primarily reflecting noncash impairment charges for the Gin Mare ($45 million) and Diplomático ($85 million) brands. The firm's outlook calls for flat organic sales and a 3%-5% organic operating income decline in fiscal 2027. Near-term profit has been waylaid by cost pressures from barreled whiskey.

Over our 10-year horizon, we model 4% annual sales growth driven by our expectation for steady low-single-digit growth in the American whiskey category (two-thirds of total sales), with incremental revenue from innovation in flavors and aging process, more effective owned distribution in Europe and Asia-Pacific, and spirits premiumization tailwinds in Latin America and developing Europe. We view the current demand headwinds in whiskey consumption in the US and developed international markets as more cyclical than structural, and think the distiller's investments in innovation and marketing should position the firm well when demand rebounds. The small ready-to-drink beverage segment should deliver high-single-digit revenue growth annually thanks to demand tailwinds, with its revenue contribution expanding from 15% in fiscal 2026 to 18% by the end of the 10-year period. Further, we expect the acquired rum and gin brands to grow sales at a mid-single-digit pace as they gradually gain distribution in retail and on-premises channels in Europe and the US.

We model adjusted operating margin to expand by 220 basis points to 30.4% at the end of our 10-year forecast period, relative to fiscal 2026, with less than half of the gains on the gross margin line. While we expect the firm to continue investing in manufacturing and supply chain capabilities to support a multicategory premium spirits portfolio, we expect cost trends to normalize following significant supply chain disruptions and commodity cost increases in the past few years. The more favorable cost trends, coupled with gradual increases in price mix driven by innovation and manufacturing efficiencies, should help gross margins expand by 70 basis points over the next decade to 61.2% by 2036. We don't expect the metric to return to the high 60s of the 2010s, as we incorporate a higher sales contribution from non-US whiskey categories where the firm faces more competition, as well as a shift from distributors to own sales teams in more European and Asian markets, which requires investments in warehouse and distribution capacities.

In addition, we expect a leaner workforce following the restructuring in 2025 and continuous productivity initiatives to drive down selling and labor expenses as a percentage of sales to 19.3% by 2036, from 20.5% in 2026. Marketing investments should remain key to preserving the intangibles around its expanding portfolio of premium brands for the longer term, and total dollar spending should rise steadily, but we forecast better efficiencies to bring such spending as a percentage of sales to 11.5% in 2034 and the following years, versus 11.8% in 2026.

We believe Brown-Forman has carved out a wide economic moat, thanks to strong brand loyalty and the tight client relationships that the spirits maker has cultivated and maintained for decades in its core whiskey business (over 70% of total sales). It also benefits from cost advantages by leveraging its scale in raw material procurement, advertising, and distribution. With its durable competitive position in the structurally attractive premium spirits market, we expect the company to deliver returns on invested capital (with goodwill) averaging 17% over our explicit 10-year forecast period, above our estimated 7.5% weighted average cost of capital, and believe the firm can maintain excess investment returns for more than 20 years.

Brown-Forman’s intangible assets moat source is evidenced by the brand prowess and entrenched client partners in whiskey. This is particularly linked to the brand collection under the iconic 150-year-old Tennessee whiskey brand Jack Daniel’s, ranked in 2022 by IWSR as the bestselling American whiskey brand in the world. Thanks to the popularity of Jack Daniel’s and bourbon brands Woodford Reserve and Old Forester, Brown-Forman holds the top value share (38%) globally in the attractive $27 billion American whiskey category in 2025, according to the most recent data from Euromonitor, followed by Japanese distiller Suntory (29%) and Diageo (7%). Brown-Forman’s dominant position in American whiskey in both on-premises and retail channels reinforces its tight relationships with clients (wholesalers and distributors) keen to capitalize on the strong growth trends in the category.

We attribute the brand appeal of Jack Daniel’s to its reputation for quality and flavor, as well as its heritage as one of the pioneering brands in Tennessee whiskey, a distinct American whiskey legally defined as 51% corn-based spirits that have been filtered through maple charcoals before a minimum three-year maturation in charred oak barrels, made exclusively in the state of Tennessee. As the distiller, Brown-Forman sells to distributors and wholesalers in its key US market given the three-tier distribution requirement for alcoholic beverages and thus does not provide pricing or volume trends of products in the end market. However, we believe the company’s consistently high gross margins—averaging 60% over the past five years, consistent with levels at larger, wide-moat spirits peers Diageo and Pernod Ricard—offer a good indication of the price premium that consumers are willing to pay for its popular drinks.

We’d also point to Brown-Forman’s success in rolling out new products and adding pricing ladders in the premium and superpremium segments under the Jack Daniel’s trademark as a testament to its brand power in engaging and maintaining its loyal customer base. Five new whiskeys have been added to the Jack Daniel’s franchise over the past 15 years, including honey, cinnamon, and crispy green apple flavors (in 2011, 2015, and 2019, respectively), as well as ready-to-drink spirits-based beverages that offer convenience and a low-calorie, low-alcohol alternative to its classic recipes. We believe the new launches have expanded consumption occasions for existing consumers and driven an influx of new drinkers to the brand family in international markets.

We also see structural factors in the spirits industry, including high entry barriers, premiumization trends, and distribution constraints that limit competition. Upfront costs to start a spirits brand are high, especially in aged categories such as American whiskey, where a significant amount of capital is tied up in warehousing inventories over the three-year maturation process. In Brown-Forman’s case, the distiller carried $1.6 billion worth of aging inventories on its balance sheet as of April 2026. The hefty upfront cost and lengthy aging process, coupled with low visibility on end-market demand and hence low distributor willingness to take on unproven brands, discourage newcomers from entering the scene.

Moreover, we believe the three-tier distribution requirements for alcohol in the US, the age verification enforced in most developed countries, and the cost and complexity of shipping bulky and heavy glass-bottled spirits have combined to limit e-commerce disruption and private-label participation. Penetration of e-commerce in spirits remains low at 2%, as is the case for private label (less than 1%), according to Euromonitor, lower than the midteens averages that characterize US packaged food.

We also think the distiller reaps scale benefits in raw materials procurement, advertising, and distribution. Leveraging its status as a major buyer of agricultural products, including corn, barley, rye, and sugar in Tennessee and neighboring states, Brown-Forman can secure top-quality ingredients at competitive prices. Just as important, its $4.3 billion revenue base and free cash flows to the firm averaging more than $900 million over the next five years afford the firm a priority spot with suppliers of key ingredients (such as glass). In addition, we think sizable international revenue ($2.3 billion) and a strong financial position allow the firm to maintain the flexibility of shipping products by costly air freight or chartered vessel to ensure brand presence and product availability during the crucial holiday season. With a $462 million advertising budget in fiscal 2026 (12% of revenue, though lower than the midteens levels at Diageo and Pernod Ricard, due to a more concentrated brand portfolio and less geographical diversification), Brown-Forman should have considerable bargaining power in negotiating event sponsorships and ad agency contracts. Meanwhile, in its owned distribution operations that have expanded across strategic markets in the EU, Australia, and Latin America, we believe Brown-Forman’s scale affords some leverage in price negotiation with on-premises and retail clients.

Premiumization trends in spirits consumption (especially in emerging markets), coupled with Brown-Forman’s strong innovation pipeline, should enable sales growth to stabilize in the midsingle digits.

Adding superpremium gin and rum brands should diversify Brown-Forman's portfolio and help open more doors with distributors and on-premises operators in Europe.

Ongoing conversion to owned distribution in key international markets in Europe and Asia-Pacific should further elevate brand positioning and foster closer ties with on-premises and retail clients.

Brown-Forman is less diversified in category exposure compared with larger rivals Diageo and Pernod and could therefore be more susceptible to volume swings should demand soften for its core American whiskey products.

Rising concern about the health impact of alcoholic beverages, especially among younger drinking-age consumers, may threaten the distiller's volume trajectory.

Short supply and price inflation of key agricultural ingredients (agave) and packaging materials (glass) may disrupt Brown-Forman’s operations.