Constellation Brands' first-quarter profit has dropped 64%, although the company's share price rose as the figures beat analysts' predictions.

The company said yesterday (28 June) that its first-quarter profit drop was due to tough competition in the UK and a recent a fall in wine shipments to US wholesalers.

"As we anticipated, our first quarter performance was impacted by our previously announced initiative to reduce distributor wine inventories in the US as well as lower results from our UK business," said Richard Sands, Constellation Brands chairman and chief executive officer.

In the quarter ended 31 May, earnings available to common shareholders reached $29.8m or 12 cents a share, compared to US$83m or 33 cents per share in the same period last year.

Excluding one-time costs, the company said that its net income slipped to 21 cents a share from 31 cents and sales fell 22% from $1.16bn to $901m .

The company said the sales figure reflected the benefits of the Vincor and Svedka Vodka acquisitions which were more than offset by the impact of reporting the Crown Imports and Matthew Clark wholesale business joint ventures under the equity method. Organic net sales decreased 2% on a constant currency basis.

The group said that branded wine organic net sales decreased 13%, primarily due to Constellation's initiative to reduce distributor inventory levels.

"In North America, the wine market remains healthy," explained Sands. "Consumer demand is strong and they continue to trade up to premium and luxury wines, with Woodbridge by Robert Mondavi, Toasted Head, Blackstone, Estancia and Simi as examples of our brands that have been benefiting from this trend."    

Meanwhile, organic net sales for branded wine for Europe increased 11% on a constant currency basis, primarily due to increased sales of popular priced wine in mainland Europe and increased sales in the UK.

"The branded wine market in the UK reflects ongoing competitive challenges as large retailers continue to benefit from the Australian wine oversupply, which has resulted in pricing pressure," the company said.
   
Total spirits net sales increased 16% for the quarter, primarily due to the acquisition of Svedka Vodka during the quarter, while organic net sales were up 2%.    

Wines segment operating income decreased $10m versus the prior year. This was primarily due to lower net sales associated with efforts to reduce distributor inventories in the US, the impact of the UK business performance, and higher stock compensation expense, partially offset by the contribution from Vincor.    

Spirits segment operating income decreased $1.9m primarily due to increased material costs.    
"The first quarter was a very dynamic one for Constellation Brands as we initiated a US wine inventory reduction programme with our distributors, acquired Svedka, formed a joint venture with respect to our UK wholesale business, utilised $500m for share repurchases and implemented measures to regain momentum in the UK market," said Sands. "We continue to be encouraged by ongoing consumer trade-up activity that we see in the US, Canada and the UK. In addition, we are optimistic about the Australian wine supply moving more into balance with demand, pleased with the progress the Crown Imports beer joint venture is making in the marketplace, and enthusiastic about future business expansion opportunities for Constellation Brands throughout Europe. We are confident about Constellation's ability to maximize the benefits from opportunities it is harvesting, and to create increased shareholder value over the long-term."

The US group also announced yesterday that its board of directors has voted in a new CEO. The company said Robert Sands has been named chief executive officer, effective from 26 July, with his brother, Richard Sands, remaining as chairman.