18 August 2007

BUD: Financial Analysis through June 2007 (Updated)

We have updated our analysis of Anheuser-Busch's (BUD) financial results for the quarter that ended on 30 June 2007 to address the financial statements reported to the SEC on Form 10-Q. Our initial evaluation was based on the data reported in a press release.

The gauge scores previously calculated didn't change as a result of the new information. As it turned out, the only data in the 10-Q relevant to our analysis that wasn't available previously was the inventory composition. The following table is extracted for Note 7 to the financial statements.

The company’s inventories were comprised of the following as of June 30, 2007 and December 31, 2006 (in millions).
June 30, 2007
Dec. 31, 2006
Raw Materials
Finished Goods
Total Inventories

For our purposes, Finished Goods/Inventory is the metric of interest. The ratio, which contributes to our Cash Management gauge, was 40.6 percent in June 2007, a rather substantial increase from 28.6 percent in December 2006. In March 2007, midway between these two periods, finished goods were 35.5 percent of total inventories.

In general, we do not like to see unusual increases in the Finished Goods ratio because the rise could be an early warning sign that sales were below expectations. It can be an omen, in the worst cases, of vendor returns of unsold product and write downs of inventory no longer marketable.

For BUD, we should take into account that beer sales zoom in the summer. The company undoubtedly wants to have enough product ready for sale when potential consumers are hot, thirsty, and milling around barbecues. Perhaps this situation, coupled with a July 4 holiday weekend, justifies a spike in finished goods at the end of June. Let's look at the historical results to see if this true.

Finished Goods /
Inventory (%)
Increase from
previous quarter
June 2007
June 2006N/A
June 200532
June 200435
June 200342
June 200240
June 200135
June 200031

We see that an increase in the Finished Goods/Inventory ratio from March to June is not automatic. The seasonal pattern does not, in and of itself, explain the surge in finished goods. It's also apparent that the recent 41 percent ratio isn't unprecedented, but it is definitely at the upper end of the range for BUD in June.

Therefore, our concern about the inventory composition isn't abated by the historical record. It's unfortunate BUD didn't provide inventory composition data last summer. We'd like to have another recent data point.

Readers might want to check out BUD's discussion of inventory during a recent conference call with financial analysts. The finished goods composition was not specifically addressed because the figures were not yet available.

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