Constellation Brands posted a 30% drop in third-quarter net income this week and lowered its profit outlook, hit by the effects of the global downturn on its major markets. Michelle Russell assesses reaction to the results in the investment community.

A slide in third quarter profit for the maker of Mondavi and Ravenswood wines this week led to a tumble in shares and a tightening of its full-year forecast.

The news that Constellation is 'battening down the hatches' certainly garnered a mixed reaction amongst the press and analyst community, particularly as it signals a change in strategy for the company.

Third-quarter net income fell by 30%, the company said earlier this week, to US$83.5m due to higher taxes. The company lowered its profit outlook to a range of $1.68-$1.72 per share, from $1.68-$1.76 previously.

Morgan Stanley analyst Bill Pecoriello told clients that he had expected the guidance to tighten. The company, he said, "seems to be offsetting the slower than originally anticipated top-line growth with belt tightening, lower interest expense and lower share count".

Constellation pointed the blame at the impact of the global economic slowdown on its key markets, notably the UK, and the ascent of the dollar against other currencies.

Despite this, the company's fiscal third-quarter earnings beat analysts' estimates by 1 cent, coming in at 60 cents per share.

However, this achievement was overshadowed somewhat by the company's 7% slide in global wine sales. Despite an 11% increase in sales of US brands such as Clos du Bois and Wild Horse, wine sales in Europe fell by 27% and by 2% in Australia and New Zealand. The company attributed this to the impact of year-on-year currency exchange rate fluctuations.

Mark Swartzberg, analyst at Stifel Nicolaus, noted that the "weakening consumer was a common factor" in all markets, and that the international business continues to demonstrate "adverse secular and competitive conditions".

And wine wasn't the only category to take a dip. Sales of spirits also headed south, down by 5% to $11m, despite a 60% gain for the company's Svedka premium vodka brand, acquired in March last year.

Pecoriello said this was far behind his predicted 4% growth for spirits, with spirits profits falling 12.6% versus Pecoriello's predicted 12.6% increase.

Constellation CEO Rob Sands sought to allay investor's fears on a conference call with analysts yesterday, saying many US consumers were waiting until the last minute to buy their New Year's Eve libations.

Sands said he was pleased with the results and was taking steps to cut costs and reduce debt "to better ensure that we will meet our future financial objectives".

He said the company would not be chasing acquisitions in 2009, signalling a clear break from several years of M&A activity in the wine sector.

Key priorities in Sands' plan include "eliminating" underperforming business lines and "bringing home the bacon" on previous acquisitions; moves that Swartzberg welcomed.

"We are encouraged that the company is as focused as it is on building margin by increasing prices, eliminating selected SKUs, and otherwise reducing structural costs," Swartzberg said.

Nonetheless, Stifel's estimates assume that comprehensive prices increases will leave the company open to a certain amount of volume share loss in all markets. "We believe this is assumed in company plans but are also watching for signs that price increases get dealt back, one way or another, due to consumer and competitive pressures," Swartzberg noted.

With European sales behind expectations, the UK remains the "worst performing market" in the company's third quarter.

Price wars amongst UK off-premise retailers, duty increases and planned SKU reductions have only served to worsen the situation, putting Constellation in the position of having to cut jobs. As a result, Sands said the company will continue reducing investment in the UK in the form of capital and operational costs.

As one of the largest wine, beer and spirit companies in the world, many would have classified Constellation as a safe haven, a defensive stock.

Yet, for the short term at least, Constellation appears to be in transition mode. Sands said the firm would review company strategy and assess the "alternatives for dealing with the challenging situation which continues to impact this business".