Constellation still has work to do

Constellation still has work to do

Investors remain nervous about Constellation Brands' prospects, despite the group's decision to raise its earnings guidance.

Constellation's share price fell by around 4% today (1 July), despite the wine giant's decision to up its full-year earnings guidance and a strong rise in net profits in its first quarter.

Analysts undermined the announcement by pointing out that the bulk of Constellation's profits rise was due to lower tax and interest charges, while the top-line remains under pressure from a depressed US wine market.

"We are unconvinced higher promotional spending is setting the stage for improving long-term share and revenue trends," said Stifel Nicolaus analyst Mark Swartzberg in a note today.

Constellation's operating profits rose by more than 13% to US$96.3m for the three months to the end of May. However, there were signs that the firm has relied heavily on cost savings initiatives as net sales slipped by 1%, to $976m.

The Robert Mondavi producer largely missed analysts' expectations.

"The disappointment was mainly a function of increased promotional spending in North America wine, where volume was up slightly but promotions resulted in a 2% decline in constant currency unit revenues," he added.

Constellation's CEO, Rob Sands, said that the firm's first quarter was "in-line with expectations".

"We are beginning to see benefits from our focus on profitable organic growth," he said, adding that new distribution and sales set-up in the US "gained traction" during the quarter.

"While macroeconomic and competitive challenges persist, we are encouraged by improving market trends in our US wine and beer businesses," he said.

The firm's new full-year earnings guidance - raised to a range of $1.63 to $1.78 from a previous $1.53 to $1.68 - reflected anticipated benefits of a $300m share buyback, set to complete before the end of November.

"While we plan to continue to pay down debt in fiscal 2011, we have redeployed a portion of free cash flow to repurchase stock as we believe Constellation shares represent good value," said Sands.

There was some good news from Constellation's Svedka vodka brand, which improved sales by 28% in the quarter on a like-for-like basis. Still, Constellation reported North America spirits sales down by 3%.

The Crown Imports beer venture with Grupo Modelo remains under pressure on a difficult US beer market. Net sales fell by 3% for the period, to $622m, damaged by higher promotions, unfavourable mix and lower volume.   

In wine, by far Constellation's largest business, North America operating profits slipped by 10% for the quarter. There was slightly better news in Europe, where operating profits crept back into the black ($0.3m) despite a 5% fall in net sales.

Sands told analysts this afternoon that the company "outperformed" the US wine industry in the first quarter and that he sees "improving trends" in imported beer.   

It was enough to stem the tide. Constellation's share price rallied from 4% down to 1% off for the day, but there is clearly a lot more work to do.