Morning Note: Market news and updates from Brown-Forman and Lululemon.

Market News

Gold is trading at $2,365 an ounce, extending its rise from yesterday, after recent US economic data reinforced bets that the Fed has room for rate cuts this year. ADP data showed that US private payrolls rose less than anticipated in May, and the previous month’s data was revised downward, indicating a softening but healthy labour market.

A Bloomberg index of global government bonds rose for a fifth straight session on Wednesday, its best performance since December. The 10-year Treasury currently yields 4.30%. The European Central Bank is expected to cut its deposit rate by 25 bps to 3.75%. Christine Lagarde is unlikely to explicitly signal another move in July but may give a gentle nod to more action in September, Bloomberg Economics said.

US equity markets moved up to record high last night – S&P 500 (+1.2%), Nasdaq (2.0%) – boosted by ongoing strength in Nvidia which exceeded a $3tn market cap for the first time and overtook Apple to become the World’s second biggest company. This morning in Asia, markets were mixed: Nikkei 225 (+0.6%); Hang Seng (+0.2%); Shanghai Composite (-0.5%).

The FTSE 100 is currently trading 0.2% higher at 8,261. Companies trading ex-dividend this morning include Informa (1.44%), Johnson Matthey (%), National Grid (4.29%), Sainsbury (3.30%), Vodafone (4.98%), WPP (3.00%). Sterling buys $1.2792 and €1.1755.

The oil price moved off its recent low and currently trades at $79 a barrel. Aramco cut prices for all of its oil to Asia next month, the first reduction since February.

Source: Bloomberg

Company News

Last night, Brown-Forman released results for the fiscal year to 30 April 2024. Revenue slowed in the final quarter and the company released new guidance that was slightly below market expectations. The market reacted by marking the shares down by 5% in US trading yesterday.

Brown-Foreman is a US-listed spirits producer, which owns a portfolio of more than 40 premium brands including Jack Daniels. To take advantage of the premiumisation trend, the group has upgraded its portfolio over time towards the American whiskey and tequila categories and sold off non-core brands (such as Finlandia and Sonoma-Cutrer).

During the latest year, the backdrop was challenging with the inventory reductions across the entire spirits value chain. Net sales, excluding excise taxes, fell by 1% to $4,178m, with the final quarter down 8% to $964m, below the market forecast of $1,030m. On an organic basis, sales fell by 1% in the full year, and by 5% in the final quarter.

The Jack Daniels family of brands were down 5% on an organic basis, driven by lower volumes for Jack Daniel’s Tennessee Whiskey and Jack Daniel’s Tennessee Honey reflecting an estimated net decrease in distributor inventories. This decline was partially offset by the growth of Jack Daniel’s Tennessee Apple and the rest of the whiskey portfolio.

Net sales for the Tequila portfolio decreased by 7% in organic terms, with Herradura down 13% and el Jimador down 1%. The newly acquired Diplomático and Gin Mare drove the Rest of Portfolio’s sales up by 15% in organic terms. New Mix ready to drink (RTD) delivered very strong sales growth of 17% in organic terms, boosted by higher prices and volumes.

By region, the US fell by 4% in organic terms, driven by lower volumes largely reflecting an estimated net decrease in distributor inventories. Elsewhere, emerging markets grew by 8%, developed international markets fell 5%, and the travel retail channel was up 6%.

The gross margin remains high and rose by 150 basis points in the year to 60.5%, fuelled by favourable price/mix and lower supply chain disruption related costs, partially offset by higher input costs. Reported operating income was up 25% in the full year to $1.4bn but fell 2% in organic terms. In the final quarter, operating income fell by 16% in organic terms. Diluted EPS grew by 32% in the full year to 214c and by 31% to 56c in the final quarter, well above the market forecast of 42c.

The company has a strong balance sheet, with net debt of $2.7bn. A regular quarterly cash dividend has been paid for 80 consecutive years and has increased for 40 consecutive years. For the latest quarter, a payout of 21.78c has been declared, up 6% on last year. The company has also completed a $400m share repurchase programme.

Looking forward, the company anticipates a return to growth for organic net sales and organic operating income in the financial year to April 2025 driven by gains in international markets and the benefit of normalising inventory trends. This outlook is tempered by management’s belief that global macroeconomic and geopolitical uncertainties will continue to create a challenging operating environment. Organic net sales growth is expected to be in the 2%-4% range, slightly below current consensus expectation, with organic operating income growth also in the 2%-4% range, implying no margin expansion.

Source: Bloomberg

Last night, Lululemon Athletica released results for the first quarter of its financial year to January 2025, with revenue and profit both exceeding expectations. The group reiterated its full-year guidance and authorised an increase in its share repurchase programme. In response, the shares moved up by 10% in after-hours trading.

Lululemon is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. Apparel items include pants, shorts, tops, and jackets designed for a healthy lifestyle including athletic activities such as yoga, running, and training. The company also offers a range of products designed for being on the move, fitness-related accessories, and footwear.

The group operates more than 710 stores across 18 countries. Revenue is split between stores, online,  and other revenue, which includes net revenue from outlets, temporary locations, sales to wholesale accounts, and license and supply arrangements. The company is also evolving its studio strategy and will focus on digital app-based services, providing in-home hardware and content for members.

The group is executing on its Power of Three ×2 growth plan, driven by product innovation, customer experience, and market expansion. The aim is to double annual sales between 2021 and 2026 from $6.25bn to $12.5bn, including a target to double men’s, double direct to consumer, and quadruple international net revenue. In FY2023, revenue was $9.6bn.

During the three months to 28 April 2024, revenue grew 11% on a constant dollar basis to $2.21bn, a touch ahead of the market forecast of $2.19bn. Growth was 4% in Americas and 40% internationally, driven by China. Comparable sales increased by 7% on a constant dollar basis. Store revenue grew by 12%, while digital increased by 8%.

Adjusted gross margin rose by 20 basis points to 57.7% partly due to lower product costs. The adjusted operating margin fell by 50 basis points to 19.6% as marketing investment was increased. Adjusted EPS grew by 11% to $2.54, well above the consensus expectation of $2.38.

The group ended the quarter with $1.9bn in cash and cash equivalents and inventories declined by 15% to $1.3bn. During the quarter, the group repurchased $297m of its shares and recently authorised a $1.0bn increase in its buyback programme, to leave current authorisation of $1.7bn.

Looking forward, Lululemon has reiterated its guidance for the financial year to January 2025: net revenue of $10.7bn-$10.8bn and adjusted EPS of $14.27-$14.47.

Source: Bloomberg