Brown-Forman's 2026 Q1 Earnings Call: Contradictions Emerge on U.S. Consumer Behavior, Emerging Markets Strategy, and Inventory Management

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 28, 2025

Financials Results

• Revenue: Reported net sales declined 3% YOY; organic net sales increased 1% YOY (FX and A&D adjusted).
• EPS: $0.36 per diluted share, down 13% YOY
• Gross Margin: 59.8%, up 40 bps YOY; +240 bps A&D benefit; offset by higher input costs/lower production, -50 bps price/mix, -50 bps FX.

Guidance:

• Reaffirmed FY26 outlook.
• Organic net sales expected to decline low single digits.
• Reported gross margin to expand (A&D benefits; price/mix largely offsets cost inflation and lower production).
• Organic operating income to decline low single digits.
• Effective tax rate ~21–23%.
• Capex $125–$135M.
• Shipments ≈ depletions for FY; 1H higher depletions/lower shipments; 2H ordering normalizes.
• Used barrel sales >50% below FY25 (material headwind).
• Canada off-shelf persists; tariffs assumed unchanged.
• Expect EM growth; U.S./developed depletion trends similar to FY25; mix headwinds from faster RTDs/agency brands; lower agave cost provides some relief.

Business Commentary:

• Geographic Sales Performance:
• Brown-Forman's organic net sales in emerging markets grew 25% in the Travel Retail channel and 7% in the overall emerging markets, while there was a 9% decline in developed international markets.

• The growth in emerging markets was driven by strong economic positioning and strategic focus on key brands like Jack Daniel's and New Mix, while developed markets faced economic challenges and disruptions in trade patterns.

• Impact of Distributor Transitions:

• The first quarter fiscal 2026 reported a 3% decline in reported net sales, with significant shipment activity related to distributor transitions.

• The distributor changes were intended to enhance partnership and coverage, but their early-stage implementation introduced noise in depletion-based business trends.

• Flavored Whiskey Innovation:

• Brown-Forman introduced Jack Daniel's Tennessee Blackberry, which showed promising consumer feedback and shipments exceeding expectations.

• This launch was based on insights into consumer trends and the desire for new flavor varieties in the whiskey category.

• Price and Cost Dynamics:

• The reported gross profit margin expanded by 40 basis points due to a 240 basis point A&D benefit, despite higher input costs and pricing pressures.
• Cost pressures were mitigated by strategic revenue growth management and strategic innovation, such as the launch of Jack Daniel's Tennessee Blackberry.

Sentiment Analysis:

• Reported net sales declined 3% YOY, but organic net sales increased 1%. Reported gross margin was 59.8%, up 40 bps, aided by A&D. Diluted EPS fell 13% to $0.36. Canada’s organic net sales declined nearly 60% due to tariffs, and used barrel sales decreased over 40%, both headwinds. Management reaffirmed FY26 guidance, expecting a low single-digit decline in organic net sales and reported gross margin expansion, with organic operating income down low single digits. Emerging markets and Travel Retail grew, offset by U.S./Europe softness.

Q&A:

• Question from Peter K. Grom (UBS): How will the distributor inventory impact evolve through the year, and is there a ~400 bps headwind to organic sales in Q2?
  Response: Shipments and depletions should align for FY26; Q1 shipment outperformance was due to Blackberry launch and U.S. distributor transitions; no specific 400 bps Q2 headwind guided.

• Question from Nadine Sarwat (Sanford C. Bernstein): Are U.S. spirits declines structural or cyclical, and what was the exit rate trend?
  Response: Management sees the downturn as more cyclical than structural; depletions should accelerate as Blackberry depletes and transitions settle, with shipments normalizing.

• Question from Andrea Faria Teixeira (JPMorgan): How are you attracting LDA consumers to Jack Daniel’s, and how is JDTW performing?
  Response: Jack is narrowing the gap versus TDS; new brand campaign and on-premise focus aim to recruit younger consumers, with depletions expected to improve post-Blackberry load-in.

• Question from Andrea Pistacchi (BofA Securities): What’s the ambition for Jack Daniel’s Tennessee Blackberry and its global potential?
  Response: Early system excitement; a phased, multi-year rollout with strong potential to globalize like Honey/Apple; meaningful depletions not yet visible due to recent launch.

• Question from Filippo Falorni (Citi): Can you detail FY gross margin drivers and the impact of used barrel sales?
  Response: Expect margin expansion from A&D and price/mix largely offsetting inflation and lower production; used barrel normalization is a headwind but included; lower agave helps.

• Question from Eric Adam Serotta (Morgan Stanley): What are you seeing in promotions and allocated bourbon supply; any impact on Woodford/Old Forester?
  Response: Pricing remains rational; tequila most aggressive, American whiskey pricing flat; strong demand for allocated line extensions; industry supply rationalizing as smaller brands exit.

• Question from Kevin Michael Grundy (BNP Paribas Exane): How will you lean into emerging markets to drive growth given slower developed markets?
  Response: Allocating more resources to faster-growing EMs (e.g., Brazil, Mexico, Turkey, UAE, India, Asia, Japan) while defending U.S.; cautious on medium-term growth rates.

• Question from Bonnie Lee Herzog (Goldman Sachs): Quantify Q1 EBIT benefit from load-in and explain price/mix headwinds.
  Response: EBIT impact details are in Schedule D; price/mix headwinds reflect faster New Mix growth and lower used barrels, partially offset by Blackberry.