Brown-Forman (BF.B) Q2 2026: Used Barrel Sales Plunge 61%, Exposing Portfolio Headwind
Brown-Forman’s Q2 revealed a sharp 61% drop in used barrel sales, underscoring portfolio vulnerability despite international growth and innovation tailwinds. Emerging markets and new product launches offset sluggish developed market demand, but persistent headwinds and a cautious industry outlook temper near-term expectations. Management reaffirmed guidance, but execution in the U.S. and inventory normalization remain central to the investment case.
Summary
- Barrel Sales Collapse: Portfolio drag from used barrel sales and Canada tariffs weighed on results.
- Emerging Market Resilience: Mexico and Brazil delivered double-digit growth, offsetting developed market softness.
- Execution Focus: Route-to-consumer changes and innovation drive cautious optimism for 2H recovery.
Performance Analysis
Brown-Forman’s second quarter and first half results were shaped by a mix of cyclical and company-specific headwinds, most notably a steep decline in used barrel sales, which fell more than 60% year-over-year. This, combined with the ongoing absence of American spirits on Canadian shelves due to trade disputes, carved more than two percentage points off top-line growth, according to management. While organic net sales were flat after adjusting for portfolio divestitures, headline reported net sales declined 4% for the first half.
Segment performance diverged sharply: Emerging international markets grew 12% organically, led by Mexico and Brazil, where RTD (ready-to-drink) innovation and Jack Daniel’s brand expansion fueled gains. The global travel retail channel also advanced, up 6%. In contrast, developed international markets and the U.S. were pressured by weak consumer sentiment and promotional activity, though sequential improvement was noted. Gross margin expanded modestly, aided by portfolio mix shifts and cost control, but operating income and EPS declined, reflecting the dual impact of lower volumes and inflationary cost pressure.
- Portfolio Drag Intensifies: Used barrel sales and Canadian trade issues combined for a material top-line headwind.
- Emerging Market Outperformance: Mexico’s RTD portfolio and Brazil’s Jack Daniel’s family led growth, with double-digit gains.
- Cost Discipline Evident: SG&A and advertising spend were tightly managed, with workforce restructuring supporting margin stabilization.
Free cash flow improved on disciplined working capital and reduced capital expenditures, but the underlying earnings trajectory remains challenged by category and portfolio-specific factors.
Executive Commentary
"Organic net sales for used barrels decreased by more than 60% as the current industry operating environment, particularly for the Scotch and Irish whiskey suppliers, continues to pressure demand and pricing. Canada's organic net sales also declined over 60% as beverage alcohol products produced in the United States continue to be off the shelves in the majority of Canadian provinces."
Lawson Whiting, President and Chief Executive Officer
"We grew cash flows from operations by $163 million to $292 million primarily reflecting disciplined working capital management. Free cash flow... increased by $179 million to $236 million, reflecting strong operating cash flow generation and lower capital expenditure needs."
Leanne Cunningham, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Innovation-Driven Growth in RTD and Flavors
Jack Daniel’s Tennessee BlackBerry, a new flavor innovation, exceeded expectations in the U.S. and is being rolled out in key international markets. Management views this as a multi-year global growth lever, not just a one-off launch. RTD products, especially tequila-based offerings like Numix, continue to gain share in Mexico, capitalizing on value-seeking behavior and flavor trends.
2. Route-to-Consumer Transformation
Major distributor transitions in the U.S., Japan, and Italy are now largely complete, shifting focus from transition to execution. Improved distributor terms are providing a sustained margin boost and have enabled better alignment of inventory with demand. Early disruption in emerging brands is being addressed, with management noting increased distributor investment and focus as a positive outcome.
3. Cost Management and Capital Discipline
Workforce restructuring and capital expenditure reductions are beginning to yield tangible benefits. SG&A declined following organizational changes, and completed capacity expansions allow for a lower CapEx run rate going forward. Management highlighted a deliberate focus on reducing finished goods inventory and working capital intensity, supporting free cash flow generation.
4. Portfolio Resilience and Brand Equity
Despite category headwinds, Brown-Forman is maintaining or gaining share in core whiskey markets like the U.K. and Germany, aided by super-premium brands and disciplined pricing. Advertising spend is being aligned with depletion-based sales, with a focus on long-term brand equity rather than short-term volume chasing, reflecting a measured approach to supporting the portfolio.
5. Navigating Category and Macro Uncertainty
Management views current trade-down activity as cyclical, not structural, and expects premiumization trends to recover as macro pressures ease. However, the company remains vigilant, monitoring promotional activity and consumer behavior closely, and is prepared to respond with targeted investment if competitive dynamics shift.
Key Considerations
This quarter’s results spotlight Brown-Forman’s balancing act between innovation-led growth and legacy portfolio headwinds, set against a cautious consumer backdrop and persistent industry volatility.
Key Considerations:
- Portfolio Headwind Magnitude: The sharp drop in used barrel sales and Canada trade dispute together shaved over two percentage points from top-line growth, illustrating the outsized impact of non-core businesses and regulatory risk.
- Emerging Market Engine: Sustained double-digit growth in Mexico and Brazil validates the company’s focus on RTD innovation and geographic expansion, but faces tougher comps in the second half.
- Execution Risk Post-Transition: With route-to-consumer changes complete, success now hinges on seamless execution with new distributors, especially during the critical holiday season.
- Inventory and CapEx Discipline: Lower production volumes and CapEx reflect a deliberate effort to normalize inventory and boost free cash flow, but may constrain near-term volume recovery if demand rebounds quickly.
- Category Dynamics: Trade-down behavior is concentrated in high-end price points, while the $10-$30 segment, which comprises the bulk of volume, is down 4%, signaling broad-based consumer caution.
Risks
Persistent macro headwinds, including pressured consumer spending in the U.S. and Europe, pose ongoing risk to volume and pricing power. The company’s reliance on innovation and emerging markets for growth may not fully offset declines in legacy segments or unforeseen regulatory shocks, such as the unresolved Canada trade dispute. Lower production to reduce inventory could limit flexibility if demand rebounds faster than expected.
Forward Outlook
For Q3 and the second half, Brown-Forman guided to:
- Low single-digit decline in organic net sales, with gross margin expansion expected for the full year.
- Organic operating income projected to decline in the low single-digit range.
For full-year 2026, management reaffirmed guidance:
- Continued growth in emerging markets and travel retail, with developed markets stabilizing but not rebounding meaningfully.
- Capital expenditures outlook lowered to $110–$120 million as major projects conclude.
Management highlighted that inventory normalization, distributor execution, and the lingering Canada headwind will shape second-half results. The benefit from improved distributor terms is expected to persist, but shipment and depletion trends should converge as the year progresses.
Takeaways
Brown-Forman’s near-term trajectory hinges on managing through portfolio-specific headwinds while leveraging innovation and emerging market strength.
- Portfolio Drag Remains Material: Used barrel sales and Canada trade issues are not transitory and will continue to weigh on reported results until resolved or anniversaried.
- Execution on Innovation and Distribution: Jack Daniel’s Tennessee BlackBerry and RTDs are critical to offsetting category softness, but require flawless execution and sustained consumer engagement.
- Cash Flow and Capital Discipline: Lower CapEx and inventory normalization support free cash flow, but could limit upside if demand recovers unexpectedly fast.
Conclusion
Brown-Forman’s Q2 underscores the company’s ability to drive growth in select markets and categories, but portfolio-specific headwinds and macro uncertainty demand continued vigilance. The investment case now centers on successful execution of innovation, disciplined cost management, and a watchful eye on external regulatory and demand risks in the coming quarters.
Industry Read-Through
The steep decline in used barrel sales and ongoing trade friction with Canada serve as a warning to other spirits producers about the risk of overreliance on ancillary revenue streams and exposure to regulatory uncertainty. RTD and flavor innovation remain the only pockets of growth in an otherwise subdued spirits landscape, with premiumization trends stalling under consumer pressure. Disciplined inventory and capital management are emerging as key levers for cash flow generation industry-wide, while successful route-to-consumer transitions and distributor partnerships will determine who can maintain share as category growth slows.