Constellation Brands, the world's largest wine firm, saw third quarter results beat analysts' expectations yesterday (7 January), but investors remained concerned by the slide in profits and sales.

Constellation Brands is on a tough road as consumers spend less on alcohol and wine prices continue to fall, noted a Goldman Sachs analyst, who downgraded the wine and spirits company.

Nonetheless, the maker of Robert Mondavi wine exceeded analysts' expectations.

Net sales for the three months to the end of November fell 4% to $988m. Net profits dropped 47% to $44m amid restructuring expenses, while operating income fell by a third to $135m.

"The company's results were decent given consumer weakness," said Gimme Credit analyst Kim Noland. She credited the company's efforts this fiscal year to lower debt by $336m to $4.1bn and "initiate a global cost-cutting programme appropriate in the current recession".

Constellation has around 70 wine brands and spirits labels such as Paul Masson brandy and Black Velvet Canadian whiskey. It also has a beer import venture with Mexico's  Grupo Modelo, importing Corona and Tsingtao into the US market.

The firm, however, has been stung by sluggish sales in bars and restaurants as many consumers seek out lower priced drinks in the economic downturn. Revenue from its branded wines fell 3% in the company's key North American market.

The pressure looks likely to continue in the next three to six months according to analyst Lindsay Drucker Mann, as the wine industry continues to struggle.

The sector has been squeezed as recession weary shoppers spend less on their alcohol purchases and wine retailers continue heavy promotions and price cuts for the holidays.

Chief executive Rob Sands confirmed this in the company's earnings report.

"US branded wine net sales have been impacted by continuing economic challenges, higher levels of promotional spending in advance of the holiday selling season, and the expected shift of sales to the second quarter from the third quarter as part of our US distributor network consolidation activities," Sands said.

Drucker Mann reduced Constellation's rating to "sell" from "neutral," adding that Constellation's stock is likely to drop after several months of increases. The company has seen its shares surge 46% over the past eight months.

Brighton Securities analyst George Conboy, however, believes the current quarter, which includes the holidays, may bring better results if consumers have begun to switch back to premium brands. He referred to the possibility as a "coin toss at this point".

Constellation's Sands said in a conference call yesterday that the firm has seen signs of sales stabilising and is particularly optimistic about US wine prospects.

Constellation's fiscal year has been dominated by a series of restructuring moves, including streamlining its distribution network and product portfolio and revamping international operations amid particular weakness in the UK and Australia.

The moves follow several years of acquisitions, including Australian vintner BRL Hardy for $1.1bn in cash and stock in 2003 and Robert Mondavi Corp for $1.3bn in 2004.

Analysts have predicted that the restructuring of the company's international wine businesses will help buffer against losses and produce positive cash flow.

"Most of the hard work on the restructuring is likely behind them now," said UBS analyst Kaumil Gajrawala.

Recent weeks have thrown up fresh problems for Constellation in its 50-50 beer venture with Modelo, Crown Imports.

Crown saw beer sales 10% to $499m in the third quarter, with operating profits down  26% to $91m.

"The bad news is Corona is weaker than expected - it's completely understood that if you sell branded imported beers versus domestics right now, there is a trade down," said DA Davidson & Co analyst Tim Ramey.

In December, Constellation vowed to defend itself after Modelo confirmed that it had filed a lawsuit to recoup marketing funds from its joint venture partner.

The move led some analysts to question the viability of the venture, which is set to run until at least the end of 2016.

Sands moved to assure investors yesterday that the lawsuit will have "no impact whatsoever" on the Crown Imports contract.

Sands said the sum in question was financially "immaterial" and added: "Both partners recognise that we have to get along and we have to work together to maximise its success."

Looking ahead, Sands said: "Overall, we remain optimistic for the future and intend to continue to work toward reducing borrowings, improving free cash flow and optimising return on invested capital."

The company reaffirmed its earnings forecast for fiscal 2010, ending in February, of $1.60 to $1.70 per share on a comparable basis. Analysts' consensus is for $1.65 per share.
Constellation shares dipped early yesterday, but had largely recovered lost ground on around $16 per share by close of trading.