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In the Spotlight - New-Look Constellation Brands

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Constellation Brands has reported a mixed start to life as a streamlined wine, beer and spirits operator in North America. Here, just-drinks exmaines the Robert Mondavi winemaker's first-quarter results and looks at the market reaction.

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Constellation's share price skipped around following its first-quarter results release yesterday (30 June), but ended up broadly where it began. Early today, it shot up by 2.5%. The yo-yo performance suggests that the market has had trouble digesting conflicting trends from the group.

There were plenty of headlines on Constellation's 19% net sales drop. This, however, was largely attributed to the loss of the Australia and Europe wine business. The headline sales performance was tempered by underlying growth in North America, where like-for-like sales rose by 3% for the three months, to $635m. Volumes in North America slipped by 3.5%, but volumes in the group's 'priority' business, which includes Mondavi and Clos Du Bois wines, increased by 4%. 
 
It's worth noting that Constellation has begun combining spirits and wine sales into one figure, which means that the North America figures also include Svedka vodka.

At the bottom line, as if to emphasise the Australia and Europe division's drag on company-wide earnings, new-look Constellation reported first-quarter operating profits up by 6%, to US$101.7m. This, despite having a smaller business than in the same period of last year.

That said, Constellation has trimmed its full-year earnings per share guidance range, to a range of $1.82 to $1.92. Previously, it said only that reported EPS would hit a maximum of $2.

Unsure as to what the future lies following Constellation's topsy-turvy statement? It wouldn't be surprising. Essentially, the group looks to have a few steps towards substantiating its claim to have "significantly improved our financial profile" by disposing of much of its overseas business.

At the same time, and at the risk of repetitive strain injury, the North American wine market remains a tough one to call. "The wine industry is pretty healthy right now," Constellation's CEO, Rob Sands, told analysts on a conference call yesterday.

He said that the firm plans to increase promotional spending in the coming quarters, after slightly underspending in the first three months of the year. Over the year, Sands expects promotional spend to be about the same as last year.

The question is whether that will be enough. Analyst group Stifel Nicolaus said in a note: "The company’s full-year EBIT view anticipates 3% US depletion growth, and 1Q depletions were down 2.3%, highlighting the need to significantly up spending, in our opinion."

Morningstar analyst Phil Gorham said of Constellation's first quarter: "Our thesis that stiff competition in the fragmented wine industry will restrict pricing power played out again."

Even though Gorham said that he expects Constellation's margins to improve over the medium-term, he added: "Despite management's efforts to shed underperforming assets, we think Constellation lacks a competitive advantage amid severe competition in its core markets. The stock appears fairly valued, and we recommend investors look elsewhere for value in the alcoholic beverage industry."

Others viewed Constellation's first-quarter a little more positively. Zacks Equity Research maintained a short-term buy on the stock and said that both earnings per share and net sales beat its consensus estimates.

There may be some positive signs, but, after only three months, new-look Constellation still has to convince many observers that it is on the right track.


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