Old Forester distillery

From Brown-Forman's Old Forester distillery, which opened in April 2018 in downtown Louisville. 

LOUISVILLE, Ky. (WDRB) – American whiskey tariffs that went into effect last summer in key markets like Europe are starting to eat into Louisville-based Brown-Forman Corp.’s bottom line.

The company, whose main product is Jack Daniels Tennessee Whiskey, on Wednesday reported flat sales and a 5 percent drop in operating income for the three-month period ended Oct. 31, compared to the same time a year earlier.

The company’s profits, or net income, still rose 4 percent to $249 million, but the increase was mainly because of tax savings under the Republican-led federal tax reform bill.

Brown-Forman said its sales grew a healthy 5 percent during the first half of its fiscal year on an “underlying” basis, which strips out factors like foreign currency exchange rates.

“If not for the tariffs, we would be on track not just to deliver another great year of top-line results, but also bottom line,” said Lawson Whiting, who is soon to succeed to retiring CEO Paul Varga, on the company’s quarterly earnings call.

Last summer the European Union, Mexico, Canada, China and Turkey placed tariffs raising the cost of American whiskey – such as bourbon and Jack Daniels – by 10 to 25 percent.

The tariffs, aimed at the home state of Senate Majority Mitch McConnell, R-Kentucky, were in response to President Trump’s duties on steel and aluminum imported to the US.

Earlier: Brown-Forman 'buying time' on whiskey tariffs, CEO says

Whiting said Brown-Forman continues to “largely absorb” the tariffs rather than passing the extra costs on to customers through price increases, but that could change.

“As we move into the summer… we are going to be more motivated to recoup at least a portion of these tariff costs,” Whiting told analysts. “We are trying to stay agile as the situation is pretty fluid.”

It’s a tough balancing act for Brown-Forman, as overseas consumers could shift their spending to spirits that are not affected by tariffs.

The company was hoping for the tariffs to be removed, particularly in its biggest overseas market in Europe, but discussions about a resolution have gone “quiet,” Whiting said.

Executives said the impact of the tariffs is right on target with their earlier estimates from August. The company remains on track to take a $35 million to $40 million hit in “underlying” operating income from tariffs in the fiscal year that ends April 30, 2019.

Brown-Forman had about $1 billion in operating income in the year ended April 30, 2018. The company had previously said the tariffs would lower its expected earnings per share by about 3 percent for the fiscal year, and it stuck to that forecast on Wednesday.

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Chris Otts reports for WDRB.com about business and economic topics, higher education and local / state government. He joined WDRB News in 2013 after seven years with The Courier-Journal. Got a tip? Chris is at 502-585-0822 and cotts@wdrb.com.