Brown-Forman shares rose nearly 5% Wednesday after the Louisville-based distiller beat earnings expectations despite a $125 million negative impact from tariffs.
Fourth-quarter net income spiked 45%, to $159 million, as higher income taxes were more than offset by lower administrative overhead.
Selling, general and administrative (SGA) expenses fell by $106 million, boosting operating income by 55%. Income taxes, at $47 million, rose by $29 million. Net sales, at $744 million, rose 1%.
Earnings per share, at 33 cents, were up by 10 cents from a year ago. The FactSet consensus for quarterly EPS was 30 cents, according to MarketWatch.
For the full year, the Jack Daniel’s owner said net income rose 17%, to $835 million, again, primarily because of lower SGA expenses, which fell by $123 million, or 16%.
The company said in a presentation that SGA spending fell because of “lower compensation-related expenses and efficiency initiatives.” Compensation expenses fell although the company now employs 4,900 people, about 100 more than a year ago.
A spokesman told Insider that SGA spending today is similar to what it was five years ago, “thanks to a focus on efficiency and productivity.”
Full-year net sales, at $3.3 billion, were up 2%. Taxes, at $207 million, fell by $53 million, or 20%.
The company said that its gross margin — gross profit as a percentage of net sales — fell to 65.2%, down 2.6 percentage points, with tariffs accounting for about 62% of the decline. If the company’s gross margin had stayed level to the prior year, its gross profit for the full year would have been about $87.5 million higher.
In response to tariffs implemented by the U.S. government, some foreign markets, including the European Union, Canada and China have imposed retaliatory tariffs on some politically sensitive U.S. products, including bourbon, made in the home state of U.S. Senate Majority Leader Mitch McConnell, R-Ky.
While President Donald Trump has said that the tariffs are needed to pressure foreign governments, particularly China, to abandon some of their business practices that harm U.S. companies overseas, local professors, trade experts and international whiskey distillers have said the tariffs would harm U.S. businesses, their employees, consumers and economic growth.
When foreign governments implement tariffs on U.S. products, it means the exporters to the market, in this case, Brown-Forman, have to pay a certain dollar amount to get their product into the market.
The exporter then has to determine whether it wants to absorb the tariff, which increases its costs and lowers its earnings, or whether it wants to pass all or part of the tariff expense to consumers in the form of higher prices.
The downside of passing the tariffs to the consumers is that products become more expensive compared to domestic competitors, which may reduce demand for the exported product.
Brown-Forman has said that it has eaten some of the tariff expenses, but it also has passed some of them on to consumers, depending on product and market, to minimize the impact on sales momentum.
However, the company also has said that the longer the tariffs remain in place the more likely it would be that consumers would see higher prices across a higher number of markets and products.
A spokesman told Insider via email Wednesday that the “tariff burden is substantial.”
So far, he said, the company has “chosen to absorb the tariff impact in most countries … to invest behind consumer momentum and we are currently planning to continue this” in the new fiscal year.
Brown-Forman said in an investor presentation Wednesday that sales in some European markets, including France and the United Kingdom, fell last year — though they improved in others, including Germany, Poland and Russia, primarily because of higher demand for Jack Daniel’s Tennessee Whiskey.
Demand for Jack Daniel’s products globally rose about 1% last year, about half as much as it would have been without the tariffs, the company said.
Its premium bourbon brands, including Woodford Reserve and Old Forester, saw global sales growth of 19 percent, in part because the Brown-Forman brands continue to gain market share.
Sales of el Jimador and Herradura tequilas rose 8%, primarily because of higher demand in the U.S. Finlandia vodka saw a sales decline of 4%, primarily because of “a competitive retail environment for vodka in Poland.”
CEO Lawson Whiting said in a news release: “Although tariffs and higher input costs will negatively impact our gross margins again this year, we believe we are on track to return to high single-digit operating income growth as we move beyond fiscal 2020. Our growth prospects remain bright as we develop our premium spirits portfolio around the world, led by the Jack Daniel’s family of brands and Woodford Reserve.”
Brown-Forman shares closed at $54.03, up 4.7%. The S&P 500 and the Dow Jones industrial average rose less than 1%.
UPDATE: This story was updated with comments from a Brown-Forman spokesman.