The Brown-Forman corporate headquarters on Dixie Highway | Photo by Boris Ladwig

Brown-Forman said that tariffs and foreign currency fluctuations hurt second-quarter sales, and operating profit fell 5 percent compared with a year earlier — though net income rose 4 percent primarily because of lower corporate income taxes.

The Louisville-based distiller said in a news release Wednesday morning that tariffs reduced second-quarter sales by about 2 percentage points. Nonetheless, second-quarter sales, at $914 million were down less than 0.5 percent compared to the second quarter of 2017.

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.

While President Donald Trump has said that the tariffs are needed to pressure foreign governments, particularly China, to abandon some of its business practices that harm U.S. companies overseas, local professors, trade experts and international whiskey distillers have said the tariffs would harm businesses, their employees, consumers and economic growth.

Brown-Forman said that while tariffs hurt second-quarter sales, the impact was offset by higher first-quarter sales, which were bolstered by distributors buying distilled products earlier than normal to avoid then-impending tariff costs.

Paul Varga

“Tariff-related buy-ins helped power first-quarter results, while the anticipated giveback materialized in the second quarter,” CEO Paul Varga said in the release.

Brown-Forman said that underlying net sales, a term the company uses to describe sales that are adjusted for items including distributor inventories and currency fluctuations, rose 3 percent in the second quarter.

The company said this summer that it had raised prices to offset the tariffs only in limited markets to minimize the impact on sales momentum, but as the year progressed, the company planned to institute more price increases across more markets, which would deflate sales.

On Wednesday, COO and incoming CEO Lawson Whiting said, “While we are largely absorbing the tariff costs during fiscal 2019, we are confident in the long-term growth potential for our brands as we continue to build awareness with new consumers and increase our global distribution.”

The distiller on Wednesday also said that its cost of sales rose 5 percent, to $320 million, compared with $304 million in the same quarter last year, and that gross profit fell 3 percent, to $590 million.

The company has previously said that it expects its cost of sales “to grow at a significantly higher rate than net sales in the remainder of 2019, as we expect to absorb costs related to tariffs as well as input cost increases in the mid-single digits.”

Whiting said in an earnings call with investors that trade discussions with Mexico and Canada seem to be moving in the right direction, but that China remained “a roller coaster” while Europe, Brown-Forman’s biggest market outside of the U.S., has gotten quiet.

The incoming CEO said that over the summer, company officials were optimistic that tariffs may get settled a bit faster than they seem to be, which means the distiller is continuing to absorb the bulk of the tariff costs for now.

CFO Jane Morreau said in the conference call that the tariffs are demanding from distillers a difficult balancing act. Brown-Forman has raised prices in some markets, but has to weigh factors including prices of competing products, cost to consumers, company margins and product momentum.

Whiting said Brown-Forman officials are beginning to discuss when to recoup more tariff costs, meaning when, where and by how much to raise prices in more markets.

“The entire tariff discussion remains a very big part of how this fiscal year is (unfolding),” he said.

Second-quarter operating income, at $332 million, was down 5 percent, but net income rose 4 percent, to $249 million, as income taxes, at $61 million, were down $31 million, or 34 percent, thanks to a tax overhaul passed by the U.S. Congress about a year ago.

Brown-Forman on Wednesday confirmed its full-year profit outlook, of about $1.70 per diluted share, up from $1.48 the prior year, based on projected underlying sales growth of about 6.5 percent. The results assume that tariffs remain in place for the full fiscal year.

U.S. markets are closed Wednesday because of the memorial service for former President George H.W. Bush.

This post has been be updated with comments Whiting and Morreau made in the earnings call.