Constellations results fell short of analyst expectations

Constellation's results fell short of analyst expectations

An unconvinced market saw Constellation Brand’s share price rally from 4% down to 1% yesterday as analysts voiced their disappointment at the firm’s first-quarter results. Michelle Russell examines the fallout.

Constellation's three-month figures fell short of expectations as the Robert Mondavi producer struggled to gain pricing traction in a highly competitive US wine industry still reeling from the country's recession.

Net sales slipped by 1% for the period, to $976m versus $1bn in the same period of last year, although the firm raised full-year profits guidance after first quarter net profits leapt to $49.1m, from just $6m a year earlier.

Svedka vodka provided the sales highlight for the firm, with sales up 28% on an organic basis for the quarter.

The results fell well short of Wall Street's expectations, which had forecast earnings of 35 cents per share on sales of $798.5m.

Analysts pointed out that a lower tax rate masked profit erosion from increased promotional spending, sending shares sliding.

"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.

North America wine sales, which make up most of the company's revenue, remained under pressure falling 2% on a constant-currency basis.

Profits were artificially boosted by certain tax items, analysts said.

Constellation's chief executive Rob Sands said he was encouraged by improving market trends in the company's US wine and beer businesses, despite persistent macroeconomic and competitive challenges.

However, analysts remained unconvinced. Pricing remains a problem for the wine group, Morningstar equity analyst Philip Gorham said. “The industry is so fragmented and there is so much competition that it's hard for even a company like Constellation Brands to raise prices,” he said.

Gorham said that the outlook is still challenging, and it's hard to see how Constellation will gain pricing power any time soon in wine or beer, where it has lost market share to other imports and craft beers.

“Although Constellation raised its earnings outlook for the remainder of the fiscal year…we think this is a result of the share-buyback programme rather than an improvement in the underlying performance of the business," he added.

Constellation's Crown Imports beer joint venture with Grupo Modelo also 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.

Still, UBS analyst Kaumil Gajrawala believes the firm’s results show consumers may finally be warming up.

"Guidance implies that company and industry trends will remain challenging throughout fiscal year 2011….but Constellation should start to see a turnaround in the second half of the year,” he added.

The sentiment was reiterated by DA Davidson analyst Timothy Ramey.

“We are seeing the swing voter, the restaurant diner, come back,” Ramey said. “When people eat away from home, they tend to have slightly more expensive taste.”

Constellation executives are confident hard-hit sales at US restaurants and bars appear to be flattening, adding that they hope to see them tick up before the end of calendar 2010.

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.

While Constellation shares dropped 16 cents, or 1% to $15.46 in trading on the New York Stock Exchange yesterday, the share price closed at $15.28.