Morning Note: Market news and updates from Brown-Forman and Lululemon
Market News
US equities drifted late in the session last night to finish little changed: S&P 500 (flat); Nasdaq (-0.2%). The 6% decline in NVIDIA was a notable drag, although the rest of Mag 7 were mostly higher. Media reports suggest Apple and NVIDIA are in talks to join the OpenAI funding round.
In Asia this morning, equity markets were more buoyant: Nikkei 225 (+0.7%); Hang Seng (+1.6%); Shanghai Composite (+0.8%). The offshore yuan hit its highest level against the dollar since June 2023 following a strong fixing and a report that China may ease refinancing on $5.4tn in mortgages to lower borrowing costs for millions of families and boost consumption. Tokyo’s core CPI unexpectedly accelerated to 2.4% in August, from 2.2% in July, supporting the case for the Bank of Japan to continue raising rates at a gradual pace.
The FTSE 100 is currently trading 0.3% higher at 8,402, while Sterling buys $1.3181 and €1.1890. According to Nationwide, UK house prices fell by 0.2% month on month in August versus expectations for a 0.2% rise. The year-on-year increase was 2.4%, below the 2.9% expected. Recent data highlighting a jump in homes for sale is unlikely to help this trend.
According to a Bloomberg News/Morning Consult poll, Kamala Harris is leading or tied with Donald Trump in each of the seven states most likely to decide the US presidential race.
Source: Bloomberg
Company News
Yesterday lunchtime, Brown-Forman released results for the three months to 31 July 2024, the first quarter of its fiscal year to end-April 2025. The figures were below market expectations, although guidance for the full year was reiterated. Although the market for the group’s premium spirits remains subdued, trends were no worse than expected, and in response the shares were marked up by 1%.
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).
As expected, during the latest quarter, the consumer and cost environment remained challenging, leading to higher input costs and weaker demand for the group’s premium whiskey and spirits. Net sales, excluding excise taxes, fell by 8% to $951m, below the market forecast of $997m. On an organic basis, sales fell by 4% due to the timing of shipments in the year-ago period related to inventory replenishment and the execution of the group’s pricing strategy.
Net sales for whiskey products fell by 3% on an organic basis. The growth of Old Forester and Woodford Reserve were more than offset by lower volumes of Jack Daniel’s Tennessee Whiskey, partially due to comparisons against the timing of shipments in the year ago period
Net sales for the Tequila portfolio decreased by 23% in organic terms, with Herradura down 14% and el Jimador down 26%. Growth of Diplomático was offset in part by a 4% decline in net sales of ready to drink (RTD) products.
By region, the US fell by 4% in organic terms, driven by lower volumes in a challenging economic environment. Consistent with company expectations, distributors are continuing to target the low end of their normal inventory range as continued high inflation and interest rates are negatively impacting the consumer and the trade. Elsewhere, emerging markets grew by 5%, developed international markets fell 6%, and the travel retail channel was down 8%.
The gross margin remains high, albeit down by 330 basis points to 59.4%, largely related to the timing of input cost fluctuations coupled with high inventory levels. Operating expenses declined by 3% in organic terms, to leave operating income down 13% at $281m. Diluted EPS fell by 14% to 41c, below the market forecast of 46c.
The company has a strong balance sheet, with net debt of $2.8bn. 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.
Looking forward, the company still anticipates a return to growth for organic net sales (2%-4%) and organic operating income (2%-4%) 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.
Source: Bloomberg
Last night, Lululemon Athletica released results for the second quarter of its financial year to January 2025. Although revenue fell short, profit exceeded expectations driven by better-than-expected gross margin expansion and disciplined execution. Although the group trimmed its full-year guidance, the shares reversed early losses to finish up 4% 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 721 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 31 July 2024, revenue grew 8% on a constant dollar basis to $2.37bn, a touch below the market forecast of $2.41bn. Growth was 2% in Americas and 31% internationally, driven by China (+37%). Comparable sales increased by 3% on a constant dollar basis. Store revenue grew by 11%, while digital increased by 2%.
Adjusted gross margin rose by 80 basis points to 59.6% partly due to lower product costs, while the adjusted operating margin increased by 110 basis points to 22.8%. Adjusted EPS grew by 18% to $3.15, above the consensus expectation of $2.93.
The group ended the quarter with $1.6bn in cash and cash equivalents and inventories declined by 14% to $1.4bn. During the quarter, the group repurchased $584m of its shares to the leave current authorisation at $1.1bn.
Looking forward, Lululemon trimmed its guidance for the financial year to January 2025. Net revenue is now expected to be $10.38bn to $10.48bn, (versus $10.7bn-$10.8bn previously) as a result of increased competition and selective consumer spending on more expensive lines. Adjusted EPS is now expected to be between $13.95 and $14.15, below the previous guidance of $14.27-$14.47.
Source: Bloomberg