Brown-Forman (BF.A, BF.B) shares have "materially underperformed" due to ongoing weakness in the spirits category and concerns over tariffs, RBC said in a Monday note.

The company likely faced continued pressure in its US spirits business during fiscal Q3, and would need to increase spending to improve sales and market share, the analysts said.

RBC analysts, including Nik Modi, said they checked in with trade contacts about the US spirits market, and the overall feedback is negative. The analysts said they believe Brown-Forman's fundamentals still lean toward the downside. The company will face additional macroeconomic pressures, increased promotional activity, particularly in tequila and bourbon/whiskey, and a "misaligned marketing strategy" for the Jack Daniels brand. Moreover, challenges with one of its key distributors could lead to near-term disruptions, further impacting performance, the analysts said.

The stock's valuation remains "historically inexpensive" and it hasn't traded at these low levels since 2011, the analysts said, adding that despite this, they are hesitant to invest "due to lack of visibility into near term earnings power."

The analysts said they are lowering their fiscal 2025 estimates based on recent checks showing weaker trends in the spirits category. They are also slightly reducing their long-term revenue expectations due to less visibility on the category's recovery. They expect lower margins as Brown-Forman will likely need to spend more to support sales and market share.

RBC lowered its Q3 adjusted earnings per share target on Brown-Forman to $0.46 from $0.48. Analysts surveyed by FactSet are expecting adjusted EPS of $0.46.

The company is scheduled to report Q3 results before the market opens on Wednesday.

RBC lowered its price target to $44 from $49 while reiterating a sector perform rating on the stock.