In the Spotlight – Constellation Brands
The news that Constellation Brands last week posted a huge slide in second quarter earnings garnered a mixed reaction amongst the press and analyst community, reflecting some of the contrasting messages that came out of the group's financials.
Many of the headlines that accompanied the story focused on the fact that the wine, beer and spirits company lost nearly US$23m in its fiscal second quarter on the back of charges to reduce the size of its operations in Australia. Despite a rise in sales of 7%, to US$956.5m, the company's stock still fell on the news.
In fact, Constellation ended beating Wall Street estimates for its results. Analysts on average were expecting earnings of 44 cents a share, according to Reuters Estimates, when the company returned 45 cents.
However, this achievement was overshadowed, some felt, on a number of fronts.
"On their face, they are essentially in line with Street estimates," Mark Swartzberg of Stifel Nicolaus said in a note. "But we consider the underlying results a disappointment as the quarter's effective tax rate, 29.1%, created $0.05 of upside versus the 37% previously indicated by the company. Disappointing beer and selected wine results (mostly international) caused comparable EBIT to be nearly 10% below our estimate."
Other reports picked up further on the mixed bag of wine and beer results. Forbes highlighted the problems Constellation was having in the beer category. The magazine pointed out that, although Constellation's sales of vodka and high-end wines jumped, these were overshadowed by a cut in the outlook for its distribution of Mexican beer in the US.
The company's wine division was also not without its weaker performers, with branded wine sales for Australia/New Zealand down 3% in the second quarter, mirroring their decline in the first quarter.
That said, overall branded wine sales rose by 6%, to $782m, driven by premium-plus US brands such as Estancia, Toasted Head and Woodbridge. Indeed, the concern for Constellation will be that a host of strong underlying performances in the business got lost in the seemingly poor headline figures.
The charges on its wine division are a necessary evil and will help refocus the division for the better on higher priced products. As Tim Ramey, an analyst for D.A. Davidson & Co., pointed out in a Reuters' article, most of the company's wines now fall in the $12 to $15 range. Ramey said: "They've moved solidly in the right direction" because wines priced between $10 to $20 wines remain the fastest-growing price point in the wine industry."
Furthermore, overall the company has maintained its full year targets despite the increasingly tricky economic environment. As the Wall Street Journal pointed out, Constellation believes it isn't seeing much evidence that consumers are trading down within product categories, despite the weakening economy. In fact, there may even be an upside to the second half as consumers and retailers adjust to price increases.
Ramey, meanwhile, concurred with the belief that the outlook for Constellation looked positive. "It's true that consumption of wine and spirits really does not decline in poor economic times and sometimes it actually improves," he said.
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