Earnings Call Transcript - BF-A Q1 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to the Brown-Forman Corporation First Quarter Fiscal Year 2026 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sue Perram, Vice President, Director of Investor Relations. Please go ahead.

Susanne Perram, Vice President, Director of Investor Relations

Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown-Forman's First Quarter Fiscal Year 2026 Earnings Call. Joining me today are Lawson Whiting, President and Chief Executive Officer; and Leanne Cunningham, Executive Vice President and Chief Financial Officer. This morning's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward-looking statements, and except as required by law, the company undertakes no obligation to update any of these statements, whether due to new information, future events or otherwise. This morning, we issued a press release containing our results for the first quarter fiscal year 2026 in addition to posting presentation materials that Lawson and Leanne will walk through momentarily. Both the release and the presentation can be found on our website under the section titled Investors, Events and Presentations. In the press release, we have listed a number of the risk factors you should consider in conjunction with our forward-looking statements. Other significant risk factors are described in our 2025 Form 10-K and from time to time in our Form 10-Q report filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures, a reconciliation to the most directly comparable GAAP financial measures and the reasons management believes they provide useful information to investors regarding the company's financial conditions and results of operations are contained in the press release and investor presentation. With that, I would like to turn the call over to Lawson.

Lawson Whiting, President and CEO

Thank you, Sue, and good morning, everyone. I'm glad to be with you to share the highlights and drivers of our first quarter fiscal 2026 top line performance with a focus on our geographic performance, a few unique headwinds to our business and strategic innovation. Then I'll turn it over to Leanne who will share additional insights on other financial highlights, including gross margin and operating expenses before she wraps up with comments on our full year fiscal 2026 outlook, which we are reaffirming. But before I begin, I wanted to take this opportunity to recognize Leanne and her 30-year career at Brown-Forman. As you likely read in our news release earlier this week, Leanne has made the decision to retire on May 1, 2026. She's been a respected colleague for the past 3 decades and a valued partner of mine since she joined the executive leadership team 4 years ago. I've seen the impact she's made not only on our business results and culture, but on the many people at Brown-Forman that she has mentored and developed over the years. Leanne, on behalf of the entire organization, thank you for everything you've done for Brown-Forman. You will be missed. So now on to our results. Overall, I'm pleased with the start to our year. Our first quarter fiscal 2026 reported net sales declined 3%, but organic net sales increased 1% after adjusting for the A&D impact related to Sonoma-Cutrer, Finlandia and Korbel as well as the negative effect of foreign exchange. From a geographic perspective, our organic net sales growth was led by the emerging international markets, which grew 25% in the Travel Retail channel, which increased 7%. This growth was partially offset by a 9% decline in the developed international markets collectively and a 2% decline in the United States. While there are a number of markets influencing these results, I'm going to focus on a few emerging and developed markets as well as the United States, which highlights some key successes, challenges and transformations that we're driving across the business. I'll start with key emerging international markets where we have positioned ourselves for strong growth. The economic environment in Mexico remains challenging with consumers trading down. But despite this, our organic net sales increased 22%. In addition, we gained market share in the RTD and Whiskey categories and continue to outperform in the takeaway results. Within RTDs, we've continued to lead the category in Mexico with the world's first tequila-based RTD New Mix. In an environment where consumers are seeking value, convenience and flavor, we're well positioned, having leveraged innovation to fuel our growth and attract new consumers while continuing to engage our current consumers. Brazil is another key growth driver of our emerging markets where organic net sales grew 30%. This is a result of many years of strategic focus on building the Jack Daniel's family of brands in the city of Sao Paulo. With this strong foundation in place, we've been expanding our geographic reach, increasing distribution for Jack Daniel's Tennessee Whiskey, along with Jack Daniel's Tennessee Apple, Honey and Fire. In addition, we believe premiumization is an opportunity in the market. Through additional focus on our super premium whiskey portfolio, we've driven increased distribution for brands such as Woodford Reserve, Jack Daniel's Single Barrel and Gentleman Jack. While off a small base, these brands are growing at a very strong double-digit rate. Turning to our developed markets. I want to focus on Europe, where consumer sentiment and confidence remain pressured in most European economies. Despite this, premiumization is still evident in some countries, and we're gaining share of the whiskey category in 7 of the 8 top European markets. Organic net sales in Germany declined 13% as economic conditions remain challenging for consumers and tariff uncertainty caused disruptions in ordering patterns from retailers, which negatively impacted the year-over-year trends. While total distilled spirits trends are in the mid-single-digit decline and the competitive environment is intensifying, Jack Daniel's Tennessee Whiskey grew value share in the market. We also saw double-digit growth for super premium brands such as Gentleman Jack and Diplomatico Rum. Similar to Germany, economic conditions in the U.K. are negatively impacting consumer spending, contributing to an organic net sales decrease of 16%. While total distilled spirits trends, including the whiskey category, are in mid-single-digit decline, Jack Daniel's Tennessee Whiskey again gained market share. The tequila category remains a bright spot, growing double digits with el Jimador gaining share. El Jimador remains the #1 premium 100% agave tequila in the United Kingdom. We continue to see el Jimador as a key introduction to consumers globally on how mixable and great tasting a 100% agave tequila can be. I'll wrap up my market comments with the United States where the decline in total distilled spirits trends remain in the low single-digit range. While organic net sales decreased 2%, the results were ahead of our depletion-based results and takeaway trends. This was largely influenced by the launch of Jack Daniel's Tennessee Blackberry and the U.S. distributor transitions, which were effective on August 1. I'll talk more about Jack Daniel's Tennessee Blackberry in a few moments. But before I do that, I'd like to share a few thoughts on the distributor transitions. As you may recall, this was the first time in 60 years we had made a significant change to our distributor partners in the U.S. We began our work on the RFP process over a year ago with the goal of driving improved performance and a material impact to our business in the U.S. And while we're very much in the initial stage of the transition, we're pleased with the early signs from our distributors and believe these changes will unlock growth, strengthen our distributor partnerships and position us to compete effectively in the evolving U.S. beverage alcohol industry. Key outcomes of the RFP process, whether our relationship with the distributor is new or existing, include increased dedication, updated business relationship terms and expanded relationships and diversification. The increased dedication comes from an almost 3x increase in headcount dedicated to the Brown-Forman portfolio, dedicated selling divisions and dedicated roles in those divisions, which will bring greater focus and coverage to our brands. We have also updated our ways of working, investment and margin expectations with an increase in distributor investment and improved margin structure. I'll turn now to a couple of items that are somewhat unique to Brown-Forman, used barrel sales and the trade dispute between the U.S. and Canada, which created significant headwinds to our first quarter organic net sales results. Organic net sales for used barrels decreased over 40% with demand and pricing reflective of the current industry operating environment, particularly the Scotch and Irish whiskey suppliers. Canada's organic net sales declined nearly 60% as beverage alcohol products produced in the United States remained off the shelves in the majority of the Canadian provinces. while our non-U.S. brands, such as Diplomatico and el Jimador continued to deliver growth, they were not able to offset the decline of our brands that are produced in the U.S. That said, we remain optimistic based on our recent developments related to tariffs under the USMCA. Finally, let me provide a few thoughts on strategic innovation, particularly for the Jack Daniel's family of brands, which saw the launch of Jack Daniel's Tennessee Blackberry in the U.S. a few weeks ago. When it comes to innovation, our goal is to extend the brand's appeal to new consumers and capitalize on new occasions while strengthening the parent brand. The launch of Blackberry has been incredibly promising and was based on insights such as innovation, particularly from flavored whiskey and U.S. whiskey being the largest growth contributor to total distilled spirits. Jack Daniel's has a proven track record of leveraging our global footprint and capabilities to extend the impact of new flavor launches. Blackberry is a globally relevant flavor trend across food and beverage categories. In consumer testing, Jack Daniel's Tennessee Blackberry had high consumer appeal resonating with a very broad audience. Distributors are excited with shipments already exceeding our expectations, and we're getting wonderful feedback and buzz on the new product from existing fans, new consumers, customers and the media. While we're excited about the start, we remain cautiously optimistic. Our work isn't done yet, and we need to fuel this excitement to drive continued momentum and strong consumer takeaway. While we're certainly proud of our strong track record of innovation, the long-term growth and resilience of the Jack Daniel's family of brands is also fueled by strategic relationships, such as our McLaren Formula One and music sponsorships. We're also leveraging an evolved on-premise strategy and our new media campaign to engage a new generation of legal drinking age consumers while remaining intently focused on retaining our core consumers. As a result, compared to a year ago, we are seeing improvements in brand health driven by young adult spirit drinkers. Across key measures of penetration, affinity and uniqueness, we see significant positive shifts in brand performance over the last year, in particular, among legal drinking age to age 34 consumers but also among consumers aged 35 and above. These positive shifts across both age categories affirm that our strategic actions are reaching new consumers while not alienating those who have been friends of Jack for years, and we will continue to take bold actions to further enhance the health and growth of Jack Daniel's. We look forward to sharing more on this during our upcoming Investor Day on October 15, where our focus will be entirely on Jack. While in-person attendance is limited, the presentations will be webcast. Details regarding the live webcast of the presentation along with the Q&A session will be shared in the next few weeks. Overall, I'm pleased with the start to our fiscal 2026 and believe we are still positioned to achieve our full year guidance. During the first quarter, we focused on strategically growing our portfolio of brands globally through a strengthened route to consumer and thoughtful innovation to help navigate the difficult short-term conditions. We're benefiting from our streamlined and simplified workforce structure, which will increase our agility in responding to this dynamic operating environment, and I'd like to thank our Brown-Forman employees for their efforts and dedication. With that, I'll turn the call over to Leanne who will provide more details on our first quarter 2026 results.

Leanne Cunningham, Executive Vice President and CFO

Thank you, Lawson, and good morning, everyone. As Lawson mentioned, I will provide additional insights on other financial highlights, including gross margin and operating expenses. I will then conclude our prepared remarks with comments on our full year fiscal 2026 outlook. First, to our gross margin. In the first quarter of fiscal 2026, our reported gross profit decreased 2%, resulting in a reported gross margin of 59.8%. Our gross profit margin expanded 40 basis points due to a 240 basis point A&D benefit largely related to the absence of the prior year transition services agreement for Sonoma-Cutrer and Finlandia. This benefit was partially offset by points of higher costs, largely due to the impact of inflation on our input cost and lower production levels, 50 basis points of unfavorable price mix due to the strong growth of New Mix and lower used barrel sales and the 50 basis points of negative effect of foreign exchange, driven primarily by the strengthening of the Mexican peso. Continuing with our other financial highlights, I'll turn to our operating expenses. In the first quarter, organic advertising expense decreased 3% as our long-term philosophy is to align A&P spend with our depletion-based top line trends and we are thoughtfully managing controllable expenses in this dynamic environment. We continue to believe our level of brand investment is healthy, which is evidenced by how we have increased our brand investment at a 4% CAGR over the last 5 years and that the strength of our brands enable us to remain competitive in the current environment. Our organic SG&A investment decreased 7%, which reflected lower compensation-related expenses related to our workforce restructuring initiative we announced in January. Our new structure creates a more streamlined organization, leveraging greater synergies and enhanced ways of working, which we believe will enable us to fuel the growth of our brands, our business and our people at a more rapid pace. In total, reported operating income decreased 7% and organic operating income increased 2% in the first quarter of fiscal 2026. In addition to the $19 million nonoperating postretirement expense, these results led to a 13% diluted earnings per share decrease to $0.36 per share. Now that we have been through our financial highlights for the first quarter of fiscal 2026, I'd like to turn the attention to our full year fiscal 2026 outlook, which, as Lawson shared, we are reaffirming. The operating environment remains volatile as the geopolitical and global macroeconomic conditions have created sustained levels of consumer uncertainty. We continue to expect that the behavior of the consumer and the level of trade inventories will not change meaningfully during the fiscal 2026 year. While the global trade environment remains dynamic and fluid, our guidance assumes the current tariff impact on our products will remain unchanged. We strongly believe that the strength of our portfolio, the benefits of our route-to-consumer transitions and our evolved workforce structure as well as strategic innovation will help us in navigating these short-term cyclical disruptions. From a geographic perspective, we expect continued growth in our emerging markets and the depletion-based trends in the U.S. and developed international markets to remain similar to fiscal 2025 with the exception of Canada. While we are encouraged by recent discussions, American Spirit products have been off the shelf in Canada for months. This had a significant impact on our first quarter of fiscal 2026, which will impact our full fiscal year results and has been included in our full year guidance. In addition to Canada, the other cyclical driver is the year-over-year change in our used barrel sales. Our used barrel sales are returning to levels that are more typical and challenging an uncertain operating environment for our industry. We still expect used barrel sales to be lower by more than half of fiscal 2025 level, which is a significant year-over-year headwind. We continue to execute our long-term pricing strategy and expect to benefit from our revenue growth management activities and strategic innovation, particularly Jack Daniel's Tennessee Blackberry, while anticipating product mix headwinds due to the faster growth of our RTD portfolio and agency brands as we ramp up these businesses in Japan and Mexico. As we prepared for the launch of Jack Daniel's Tennessee Blackberry and the transition to our new distributors in the U.S., we experienced unusual phasing in the first quarter of fiscal 2026, leading to higher shipments compared to the year ago period. We continue to anticipate that shipments will roughly equal depletions in fiscal 2026 and which will result in higher depletions and lower shipments as we progress through the remainder of the first half of our fiscal year. As our new distributors become fully integrated and the initial launch of Jack Daniel's Tennessee Blackberry concludes we anticipate that ordering patterns in the second half of the year will normalize to reflect more typical seasonality. For fiscal 2026, based on the currently known factors, we expect a low single-digit decline in organic net sales and reported gross margin expansion as we believe price/mix will largely offset cost and that we will benefit from A&D. While input costs will continue to benefit from lower agave cost, we project higher costs compared to the prior year period, largely driven by the impact of inflation and lower production volumes. In addition, as we shared previously, following the divestiture of Finlandia and Sonoma-Cutrer brands, we entered into transition services agreements, which had a negative impact on our overall reported gross margin. the TSAs had ended, resulting in a positive impact on a year-over-year basis. Also, the absence of Korbel is expected to benefit reported gross margin. Our outlook for organic operating expenses in this challenging environment continues to reflect investment behind our brands, utilizing our long-term brand expense philosophy to align A&P spend with our depletion-based top line growth. We also continue to expect a reduction in SG&A related to our strategic workforce restructuring initiative. Based on the above, we are forecasting organic operating income to decline in the low single-digit range. We also expect our effective tax rate to be in the range of approximately 21% to 23%. And then our estimated capital expenditures will be in the range of $125 million to $135 million for the fiscal year. While this range is lower than previous years, we have completed a number of projects and expansions and continue to fully invest behind our business. In addition to lower capital expenditures compared to fiscal 2025, and we also continue to focus on reducing our finished goods inventory, which should further reduce our working capital and significantly improve cash generated. Our first quarter was a good start to fiscal 2026. While volatility and uncertainty will likely be words we continue to use throughout this fiscal year, we have taken actions focused on our geographies, our portfolio and our people that we believe will enable us to navigate the short-term challenges as well as position the company to deliver long-term growth. Before opening the call to Q&A, I also wanted to take a moment to say thank you. It's impossible to put into words what the last 3 decades of Brown-Forman has meant to me. This journey has allowed me to travel the world, build some of the most iconic spirits brands and work with the most talented teams in the industry. My greatest accomplishments are not personal achievements. They are the shared success that come from working with exceptional people who are passionate about making a difference. I look forward to working with Lawson and the entire executive leadership team to ensure a thoughtful seamless transition to my successor and remain committed to delivering our fiscal 2026 ambitions. While my career at Brown-Forman will conclude next May, I will forever wear the titles of long-term shareholder, brand ambassador and proud consumer of our highest quality Premium Plus portfolio. This concludes our prepared remarks. Please open the line for questions.

Operator, Operator

Our first question comes from Peter Grom of UBS.

Peter Grom, Analyst

Leanne, congratulations. Thank you so much for all the help over the years and best of luck moving forward. I guess I just wanted to follow up quickly just on kind of the distributor inventory impact. Clearly, a nice tailwind to sales in the first quarter. But I just want to understand and clarify kind of how you see that evolving as we move through the balance of the year. I think you mentioned, Leanne, that it would be largely complete by the end of the first half. So I just wanted to clarify that. As we look out to the second quarter, would you anticipate a 400 basis point headwind to organic sales? Or did I mishear that? Or am I misunderstanding that?

Leanne Cunningham, Executive Vice President and CFO

For the entire fiscal year, we expect shipments and depletions to align, particularly in the U.S., where we do not foresee any significant changes in trade inventories. In our June call, we noted there would be some shipment disruptions due to transitions in the U.S., making it challenging to predict these numbers. Overall, we believe our distributors will continue to aim for maintaining low inventory levels, reflecting the normal range needed by retailers. In the first quarter, our shipments exceeded depletions, primarily due to the launch of Jack Daniel's Tennessee Blackberry, the new el Jimador package, and distributor transitions in the U.S. There was a 6% increase in net change of distributor inventories in the U.S. and a 10% increase in our emerging international markets, attributed to phasing comparisons from the previous year for the UAE and rebuilding inventory in Paraguay and Uruguay after importation disruptions in fiscal '25. We believe shipments and depletions will remain aligned for the full year, and we anticipate our results for the first half will be consistent with our full-year guidance from a top-line perspective.

Operator, Operator

Our next question comes from the line of Nadine Sarwat of Bernstein.

Nadine Sarwat, Analyst

Lawson and Leanne, I want to focus my question on the U.S. I understand the impact of distributor inventory build and the disruption it causes. I'm interested in the underlying growth rate, which was down 8%, weaker than what you had last year in Q4 and Q1. I have two questions regarding this. First, for the quarter, as you exited it, was the trend the same, weaker or stronger, along with the distribution? My second question is, considering the underlying performance, do you believe the weak U.S. alcohol trends are driven by structural or cyclical factors? I appreciate this question, as it seems repetitive every quarter, but it's a critical issue. I would love to hear any updated thoughts you might have on this.

Lawson Whiting, President and CEO

Take the beginning of that.

Leanne Cunningham, Executive Vice President and CFO

Yes, do you want to go ahead and start with the second part on cyclical?

Lawson Whiting, President and CEO

Yes, Nadine, that's a good way to put it because my answer will be similar to what we've said in the past, but let me elaborate. We anticipated this situation. There are some new details, but it's a lengthy explanation, so bear with me. The discussion about structural versus cyclical issues has been ongoing for about 18 months. On the cyclical side, there are indeed challenges concerning consumer buying power. We've discussed this before; inflation and rising interest rates are definitely impacting consumers. The uncertainty surrounding tariffs has been a global issue that hasn't helped either. However, if I had to identify one strong factor indicating this is more cyclical, it would be comparing where we are now to two years ago. Back in Q1 of 2021, TDS was still around a positive 5% to 6%, which is hard to believe considering how much has changed in two years. This timing is crucial. In the summer of 2023, we were at 5% or 6%, but by Christmas, it dropped to 0%, and into 2024, it went negative, staying in that range since then. I would argue that nothing, not even global factors, can shift a market from plus 6% to minus 2% so rapidly. I don’t believe that structural issues, such as the cannabis and health and wellness trends, can cause such a quick downturn. While there's certainly a connection between cyclical and structural elements, I think everyone would agree that the cyclical side plays a larger role. Regarding health and wellness moderation, which has been frequently discussed and covered in the media, some individuals are drinking less often or consuming fewer drinks per occasion. Others are moving towards lower or no-alcohol options. The trend of drinking less but better has been present for a long time, and we believe we've adapted well to that. The shift from beer and wine to spirits has been ongoing, as we all know. What are we doing about it? We have altered our portfolio, focusing on premium and super-premium products, which we believe will benefit us in the long run. A recent Gallup poll indicated that the number of Americans drinking is at an all-time low. While we acknowledge that there has been a decline in American drinking, our internal analyses, including IWSR and Nielsen data, show mixed results. The poll seemed to exaggerate the extent of the decline, as we don't see many Americans completely exiting the alcohol market; rather, they're just reducing their consumption. Additionally, GLP-1 medications have gained attention but their impact has lessened compared to a year ago. Similarly, the cannabis trend is often overstated in its immediate influence on spirits consumption. There are also hemp-based beverages emerging due to a legal loophole from the 2018 Farm Bill, which raises safety concerns due to a lack of regulatory framework, though I don't think this will materially affect market takeaway. There are also positive trends to consider. The focus has shifted to the negative side of the conversation, but Gen Z, who are in their twenties and typically the biggest consumers of alcohol, are facing significant cyclical challenges, particularly regarding financial pressures. While this might hinder their current consumption, we shouldn't overlook the longer-term trends. The number of Gen Z consumers is growing, global drinking ages are rising, and middle-class demographics are expanding worldwide, which we view positively. We’ve also seen more women entering the spirits market, another promising trend. In conclusion, this is a combination of cyclical and structural factors, though I urge caution against overstating the structural aspects. I’ve participated in over 50 earnings calls in my career, and I think this has been my longest response ever. I apologize for the length, but I believe this is a critical topic concerning the long-term health of our industry.

Leanne Cunningham, Executive Vice President and CFO

And then hard to follow. But to your first question, Nadine, back to the U.S. and the exit rate. What we would say is we've got 13, 14 states, including California and transition. Every state has been unique. Collectively, we probably did decelerate as we neared the August 1 transition date, there's noise even in our depletion-based business due to these transitions. We do see in some of these states where there's a gap where takeaway is stronger than depletions. And as we think about where we will be for the remainder of this first half, we would expect depletions to accelerate and shipments to lower, again, coming in line with more of our full year guidance.

Lawson Whiting, President and CEO

Yes. I believe that will happen relatively soon, as we have shipped a significant amount of Blackberry in the first quarter without seeing any depletions. The depletions are on the way, and I think they will normalize quickly.

Operator, Operator

And our next question comes from the line of Andrea Teixeira of JPMorgan.

Andrea Teixeira, Analyst

Leanne, I want to echo the appreciation for you and wish you well. Thank you for your patience and for teaching us more about Brown-Forman. I’d like to revisit the segmentation of Jack Daniel's specifically. Lawson, you mentioned that you don't see any secular trends, but when considering premiumization, you still have good volume for the mainstream Jack Daniel's, which is premium. However, with the fragmentation among consumers in ready-to-drink products, you have a strong offering there. I’m curious about how you plan to attract younger consumers and those of legal drinking age in the long term, and what changes you may consider. How has Jack Daniel's performance impacted your consumption numbers recently? We can see your shipments, but I'm interested in how consumption has been, especially regarding Jack Daniel's.

Lawson Whiting, President and CEO

I believe that if you are asking about consumer perception of Jack compared to other offerings like TDS or whiskey, we have been gradually narrowing the gap. It really depends on your perspective, but we believe we are making progress against TDS. Over the last four or five months, TDS has improved slightly, though markedly so, with an increase of around 10%. We're not seeing major jumps, but there are small improvements. When analyzing Nielsen data by price point, particularly in the $20 to $29 range, we are closely aligned, down about 4% to 5%. TDS is currently benefiting from the popularity of RTDs. Among the top 20 brands in the U.S., Jack Daniel's is performing well, roughly at the average level. Only three brands in the top 20 are experiencing growth, one of which is Woodford, which we are pleased about. Back to the strength of Jack Daniel's Tennessee Whiskey and how to continue attracting new consumers, a significant change has been our consumer communications campaign launched three months ago, titled "That's What Makes Jack, Jack." Initial feedback has been very positive, and a key metric showing a meaningful improvement gives us confidence. Jack Daniel's has unique attributes that we have not highlighted enough until now, and we are reclaiming that space effectively, which is crucial for the brand's long-term health. Additionally, we have recommitted to music, hosting songwriter camps in Lynchburg three times a year, which connects us deeply with country music. Mentions of Jack Daniel's in songs have significantly increased, showing our relevance in both country and rock music. The Jack's Garage experience is also gaining popularity worldwide. We believe we are pulling all the right levers. Another key initiative is revitalizing the on-premise presence in the U.S. and other major markets. We have dedicated resources, called the Jack Pack, to focus solely on trade in key cities. Lastly, we have new distributors that are eager to promote Jack Daniel's Tennessee Whiskey, a highly sought-after brand. Although we just transitioned three weeks ago, I urge caution about drawing too many conclusions from the first quarter results due to initial noise. The system will stabilize over the coming months, and it is our responsibility to increase consumer takeaway moving forward.

Operator, Operator

Our next question comes from the line of Andrea Pistacchi of Bank of America.

Andrea Pistacchi, Analyst

I wanted to revisit the Jack Daniel's Blackberry, which has been available for a few weeks now. You seemed quite optimistic in your initial comments about the launch. Could you provide some more details on the response from the trade and the rollout pace? What are your ambitions for Blackberry? Do you think it could achieve similar success to other flavor launches like Apple Fire, which reached around 200,000 to 400,000 cases? I believe you touched on the brand's potential to expand geographically. Do you see similar potential for Blackberry as we have with other flavors?

Leanne Cunningham, Executive Vice President and CFO

Yes, I'll start with that, and Lawson can build on. For Blackberry, we are off to a really strong start. And to your point, we have only the second half of July, started to get those shipments out there in preparation for the launch. So there's really not a lot of depletion-based information or consumer takeaway that we can comment on yet, but we can say that there is a significant amount of excitement in the system from our distributors. There's a lot of wonderful feedback and buzz that we're getting from both existing and new consumers, customers, media, as we thought about this strategic innovation and we consider Blackberry. Again, it is a natural flavor. It is found largely around the world. It fits with consumers' pallets. And 1 thing we believe that we're strong here at Brown-Forman and is globalizing these flavors utilizing our existing network as we've done with Honey and we've done with Apple. And if you've seen, we actually had really strong results on Tennessee Apple for this quarter as well. So we do believe this is a brand that we can globalize and then it will resonate well. Outside the U.S., there's not as much competition in flavored based whiskey. So we're excited about what we'll be able to do with that. And again, all of that will layer in over time because we're just now in our very first weeks of shipping in the U.S.

Lawson Whiting, President and CEO

Yes, to add to that, the global aspect is significant as Leanne mentioned, and it sets us apart from many competitors in this field. We see this as a long-term growth opportunity, not just limited to the first quarter. This fiscal year, we plan to implement it across various sizes and markets. We are optimistic about its potential as a multi-year growth driver. Additionally, one challenge in flavored whiskeys is finding suitable mixers. Many brands focus on shots, but there haven't been many good natural mixers available. However, this product pairs excellently with lemonade, which has been one of the best-flavored whiskey combinations I've tasted, and it works well. We needed a strong mixer to support its long-term growth, and I believe we have found that.

Operator, Operator

Our next question comes from the line of Filippo Falorni of Citi.

Filippo Falorni, Analyst

Leanne, congrats and thank you for all the help throughout the years. So maybe a question for you, Leanne, just on the gross margin. You had a 40 basis points of gross margin expansion in the quarter. Is the expectation for the year of still seeing some gross margin expansion on a full year basis? And maybe you can walk us through the components, how to get to the expansion. It seems acquisition and divestiture should be the biggest benefit. And then on the other side, if you can look to the cost side both on the commodity part, but also the used barrel sales negative impact on margins, that would be helpful.

Leanne Cunningham, Executive Vice President and CFO

Okay. So first of all, I would say we're off to a really strong start for our fiscal year. Our margins are well positioned with 40 basis points of expansion in the first quarter to 59.8%. We've given you kind of the breakdown for that, so I won't go back through that. From a full year perspective for '26, yes, we're going to continue to benefit from the absence of Finlandia and the Sonoma-Cutrer. The absence of those TSAs as well as the absence of Korbel. We do believe our price mix will largely offset our cost. And then as we said in our prepared remarks, our costs are really driven about the impact of inflation on our input costs and then lower production volumes. We are still benefiting from some lower agave costs, but that's being offset by the 2 things that I just mentioned. As it relates to used barrels, again, we are coming off 3 very strong years of sales, F'25 being our strongest year. So now as we normalize that high-margin business and the absence of that, all of that is built into the guidance that we have provided for the full year.

Operator, Operator

Our next question comes from the line of Eric Serotta of Morgan Stanley.

Eric Serotta, Analyst

Leanne, congratulations. It's been a pleasure working with you, and I'm looking forward to celebrating in Lynchburg in October. Lawson, what are you observing regarding the competitive and promotional landscape? Last quarter, you noted that surprisingly, everyone was quite rational up to that point. I understand that the first quarter isn't typically a heavy promotional period, but any further insights would be appreciated. As a consumer, I've noticed more allocated bourbons available. I'm not referring to the high-end bottles priced around $200 that are often marked up to thousands, but rather those in the $30 to $60 range that have been difficult to find or were priced much higher in the past. Are you seeing a similar trend with your allocated products and those from competitors, excluding Birthday Bourbon? Additionally, do you think this is affecting brands like Woodford and Old Forester?

Lawson Whiting, President and CEO

That's a good question. If I take a moment to reflect, I believe we've discussed this on several occasions. American whiskey and tequila are the two categories that provide the best opportunities for super-premium and ultra-premium line extensions, especially American whiskey due to the versatility of the barrel. We see ourselves as leaders in this area and have introduced many unique and successful innovations over the years. You're correct that the larger brands have certainly taken notice of what can be achieved with high-end line extensions. Double Oaked is likely our most successful line extension to date. There are many exciting developments in this segment. Jack Daniel's offers its 10-year-old, 12-year-old, and 14-year-old options, all of which are in high demand, well exceeding our available supply. There are also several offerings in Woodford and Old Forester, like Birthday Bourbon, as well as President's Choice and other sought-after extensions. We plan to continue pursuing these opportunities because we believe they will perform well. Regarding your shorter-term question about promotions, there are indeed more brands on shelves, which affects promotions, but pricing has remained quite rational overall. Tequila seems to be the most competitive category, and American whiskey is holding its ground. Overall, the category appears flat, and pricing has remained stable according to Nielsen data from the last 13 weeks. Despite industry concerns regarding supply and its impact on pricing, we haven’t observed significant changes quarter-over-quarter, which we see as positive. As for industry supply, though no one asked, I’ll provide some insight. It appears to be rationalizing. Many entrepreneurial brands are struggling, with several going out of business, which contributes to a crowded market in both American whiskey and tequila. However, I believe that over time, this will lead to a reduction in the number of brands. We are eager to reclaim some shelf space. Although these smaller brands have not captured meaningful market share, a handful of companies continue to dominate the industry supply, and many have reduced their output. I think you’ll be surprised at how quickly these dynamics can adjust, especially if we see some volume growth. The risk associated with supply issues seems to be lessening compared to six months ago.

Operator, Operator

And our next question comes from the line of Kevin Grundy of BNB Paribas.

Kevin Grundy, Analyst

Leanne, I want to congratulate you and wish you the best in your retirement. Now, I have a question for both of you that takes a broader view. Lawson, regarding your strategy for driving growth in the portfolio geographically, I appreciate the insights you've shared about your successes in Brazil and emerging markets. As we consider your ability to return to your long-term growth algorithm, it's clear there is considerable skepticism around this, as you know. This strategy seems to rely more on emerging markets than before. Can you discuss whether there is a chance to accelerate this growth? How do you view investment levels from a portfolio perspective, especially when considering the U.S. and developed markets? The market seems to believe that the current challenges are more structural than cyclical. I'm eager to hear your thoughts on how you plan to focus on emerging markets and speed up growth, which is becoming increasingly crucial, and what that would mean for achieving your long-term guidance. There's a lot to unpack here, but I would appreciate your insights.

Lawson Whiting, President and CEO

That's a great question. We are spending considerable time examining and discussing this. Regarding the established big markets, I don't see them as declining; I don't believe that's the medium-term outlook. However, whether it returns to growth around four to five is difficult to predict, and I don't have definitive insights. While some are making predictions, I prefer not to do so. We've often discussed how to adapt our portfolio in a lower growth environment, and what changes might be necessary within specific geographies. We will be allocating more resources to emerging markets, as growth isn't limited to Brazil; there are significant opportunities in Turkey, the UAE, and particularly in India, which we still consider relatively small. This is a market that warrants additional resources, and we see meaningful potential there. I do not want to imply that we are moving resources away from the U.S. market, as it remains our most profitable and presents substantial opportunities. Our portfolio is well-suited for the U.S. consumer, and we want to ensure we maintain our share in that market. Looking ahead, we believe emerging markets will continue to thrive, particularly in Mexico and across South America, where we've experienced success recently, and we intend to sustain that momentum. India is important, and while it may seem unusual to discuss the Middle East, we're witnessing growth there and are optimistic about it. Asia presents numerous opportunities that we need to tap into, and Japan, despite being a challenging market, represents a significant premium bourbon market where we are better positioned now after establishing our own sales force there about a year ago.

Operator, Operator

Our next question comes from the line of Bonnie Herzog of Goldman Sachs.

Bonnie Herzog, Analyst

Congrats and best of luck, Leanne. I wanted to ask a couple of things. First, shipments, as we've discussed, were well ahead of depletions in Q1. As a result, this was certainly a benefit to organic sales in the quarter, but could you quantify for us the EBIT impact of that load-in in Q1? And then second, I guess I was hoping for some more color on your price/mix in the quarter. I think it was down around 5%. So could you maybe just touch on the drivers of that? And again, how we should maybe think about price/mix for the rest of the year?

Leanne Cunningham, Executive Vice President and CFO

To your first question, if you take a look at the bottom of Schedule D, we try to provide that information throughout the P&L. You can see the details you're looking for there. From a price/mix perspective, it's largely about the mix related to the higher growth of New Mix and the lower sales of used barrels we experienced, which was partially offset by the launch of our Jack Daniel's Tennessee Blackberry.

Lawson Whiting, President and CEO

I’m not sure if I misunderstood you, Bonnie, but regarding the gross margin slide in the deck, the price/mix impact on gross margin was actually 0.5%, not 5%.

Operator, Operator

This concludes the question-and-answer session. I would now like to turn it back to Sue Perram for closing remarks.

Susanne Perram, Vice President, Director of Investor Relations

Thank you. And thank you, Lawson and Leanne, and thanks to everyone for joining us today for Brown-Forman's First Quarter Fiscal Year 2026 Earnings Call. If you have any additional questions, please contact us. We look forward to participating in the Barclays Global Consumer Staples Conference next week and hope to see many of you. For those of you unable to attend our fireside chat on Wednesday will be made available as a webcast, accessible via the Brown-Forman corporate website under the section titled Investors, Events and Presentations. To wrap things up, the story of Jack Daniel's begins on a day in September about midway through the 19th century, but no one can agree on exactly what day he was born. One thing we do agree on, though, is that Jack's birthday is certainly something to celebrate and since we don't know the exact date, we choose to celebrate any day in September. So we hope you'll join us in raising a glass, which every day you choose, as we say happy birthday to Jack. With that, this concludes our call.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.