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Brown-Forman on the rocks with splash of tariffs, Brexit

Brown-Forman Corp. executives said tariffs will continue to impact the company's performance through the first half of fiscal 2020, but the effects would ease in the third quarter.

"The impact in this year's first quarter is significant," Executive Vice President and CFO Jane Morreau said of tariffs during an earnings call Aug. 28.

Retaliatory tariffs from Europe in particular influenced Brown-Forman's underlying performance, Morreau said. In June 2018, the EU imposed tariffs on about €2.8 billion of U.S. products, including a 25% levy on whiskey.

Tariffs caused a drop in Brown-Forman's gross margin for the quarter ended July 31 to 64.9% of net sales from 68.2% in the year-ago period, the company said.

Tariffs hurt net sales in the U.K. and Germany. Underlying net sales in the U.K., Brown-Forman's second-largest market, declined 14% from the year-ago period, and underlying net sales in Germany dropped 9% in the same period, the company said. Morreau also cited Brexit-fueled uncertainty as a factor in the net sales decline in the U.K.

Brown-Forman reported earnings Aug. 28 that beat Street expectations on net income and EPS. Brown-Forman shares closed 0.24% lower at $58.85 on Aug. 28.

The tariffs are affecting Brown-Forman as a result of comparisons of this quarter with the year-ago period, which saw higher buying volumes before tariffs went into effect and the tariff costs the company took on rather than passing along, President and CEO Lawson Whiting said during the call.

Brown-Forman could also face tariffs from China as part of the levies announced Aug. 23, but Brown-Forman executives did not mention that prospect during the call. The tariffs from China include a 5% levy on whiskey, which would become effective Dec. 15, according to CNN.

A 14% drop in net sales for travel retail from the year ago period compounded some of the volatility Brown-Forman saw, Whiting said during the call. Brown-Forman did not go into detail about why exactly travel retail sales dropped.

Flat underlying sales reported by Brown-Forman for the first fiscal quarter were not concerning, according to an Aug. 28 note from SunTrust Robinson Humphrey analyst Bill Chappell. The company's sales are expected to bounce back in the second quarter, Chappell said.

"The gross margin drag in the quarter from tariff pricing was less than we had expected," Chappell said.

Truly you must be joking

When a television commercial aired showing a man dumping out a bottle of generic whiskey before grabbing an ice cold Truly Hard Seltzer, Lawson took note.

"Obviously, Truly's coming at us a little bit but I would argue that the whiskey category is a little bit more insulated from this sort of spike in hard seltzer demand," Lawson said.

Boston Beer Co. Inc. owns the Truly Hard Seltzer brand at a time when growing sales of hard seltzer is among one of the strongest trends in the beverage industry, according to an Aug. 20 report by Jefferies analyst Kevin Grundy.

Hard seltzer appears more competitive with beer and vodka because its consumers tend to skew female and younger, Lawson said.

The tax structure for ready-to-drink products is more punitive for spirits than it is for beer or malts in the U.S., Lawson said. Still, the rise in demand for drinks like hard seltzer is something Brown-Forman is watching, Lawson said.