Brown-Forman Net Misses Estimates on Higher Costs

Brown-Forman Corp. (BF/B), the maker of Jack Daniel's whiskey, said third-quarter profit rose less than analysts projected as grain costs climbed and sales of Southern Comfort liqueur slowed.

The stock fell the most in two weeks as the maker of spirits and wine narrowed the range of its full-year earnings forecast.

Higher sales of Jack Daniel's bourbon and Finlandia vodka were damped by declining purchases of Southern Comfort after the company raised prices in a slowing economy. Brown-Forman's gross margin, the share of sales after subtracting the cost of goods sold, narrowed 2 percentage points, mostly on grain used for distilling.

``The price of corn and wheat and other agricultural commodities have really just been increasing at a substantially higher rate than we had guessed,'' Kaumil Gajrawala, an analyst with UBS Securities LLC in New York, said in a research note. ``It's going to be the thing to watch for the next year or so.''

The company's Class B shares fell $2.30, or 3.5 percent, to $63.77 at 4:16 p.m. in New York Stock Exchange composite trading, the most since Feb. 13. They've dropped 14 percent this year.

Net income climbed 10 percent to $116 million, or 94 cents a share, the Louisville, Kentucky-based company said today in a statement. The average estimate of six analysts surveyed by Bloomberg was for third-quarter earnings of 99 cents a share.

Sales increased 16 percent to $877.4 million including excise taxes in the three months through January, missing the $879.2 million average estimate of analysts.

Rising Grain Prices

Brown-Forman narrowed its full-year profit forecast to $3.42 to $3.50 a share, from $3.42 to $3.54.

Rising grain prices have cost Brown-Forman an additional $7 million since May and will total about $10 million for the company by April, Chief Financial Officer Phoebe Wood said on a conference call.

Southern Comfort wholesale shipments to retailers declined by a ``low-single'' digit percentage globally, Wood said.

U.S. sales of Jack Daniel's on a volume basis, which declined in the second quarter, rose by a ``low-single'' digit percentage during the third quarter. International volume sales of the bourbon, the company's biggest selling product, advanced by a ``mid-single'' digit, Brown-Forman said.

``Slower international trends are giving less offset to a weakened U.S.,'' Andrew Sawyer, an analyst with Goldman, Sachs & Co. in New York, said in a research note. He recommended selling the stock, citing ``weak fundamentals over the immediate term.''

Spirits accounted for 86 percent of the company's 2007 revenue.

Advertising Spending

Operating income in the quarter rose 8 percent. The company boosted advertising spending 14 percent to $108 million.

``They have been able to show decent growth in North America with operating income while still investing in the business,'' Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, said in a telephone interview.

Brown-Forman repurchased $122 million of its shares in the quarter, nearly completing $200 million in buybacks authorized in November, Wood said during the conference call.

Liquor sales in the U.S. climbed 5.6 percent to $18.2 billion last year, the Distilled Spirits Council of the U.S. said last month. Sales growth may slow to 4.6 percent this year, which would be the smallest gain since 2001, the group said.

(A recording of the company's conference call on the third quarter is available at http://www.brown-forman.com.)

To contact the reporter on this story: Duane D. Stanford in Atlanta dstanford2@bloomberg.net.

To contact the editor responsible for this story: Mike Nol at mnol@bloomberg.net.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.