Constellation Brands upbeat as shares drop

Constellation Brands has said that it remains confident that wine sales will improve in the near future, amid signs that investors are nervous.

The company's share price sank by 3% today (5 January) after the Robert Mondavi winemaker missed most analysts' sales estimates for its fiscal third quarter. Net sales fell by 27% for the three months to the end of November, to US$701m, versus a consensus estimate of $722m.

The group's sale of 80% of its Australia and Europe wine business at the start of 2011 meant that net sales were always likely to fall in its current fiscal year. But, some analysts were unprepared for the level of sluggishness in Constellation's core North America wine business. On an organic basis, nine-month net sales fell by 2% and third-quarter sales dropped by 8%.

For the third quarter, Constellation's US wine sales by volume fell by 10% on the same period last year, and by 6% for the first nine months of the company's fiscal year. There was better news for the wine 'Focus Brands', but even these saw volumes drop by 5.7% and 1.3% for the third quarter and nine months respectively. 

On the positive side, distributor sales to retailers - known as depletions - showed gains, with focus brand depletions up 6% in the third quarter. Constellation's CEO, Rob Sands, was keen to highlight this figure as evidence that the business is moving in the right direction. 

He blamed planned price rises for causing Constellation to lag US wine market volume trends in the current year. But, he told analysts on a conference call today: "Our plan is to grow in-line with the category next year. We should go into next year with good momentum to achieve that."

The wine focus brands, he added, "constitute the vast majority of our profitability in the US". Sands said that Constellation is "firing on all cylinders" in terms of innovation and that sales should show marked improvement in the fourth quarter of the current year. 

Analyst group Stifel Nicolaus expressed concern about Constellation's profits momentum today. "Deleveraging continues, and items below the EBIT line drive an improved free cash flow outlook, but we continue to see little evidence of internal capacity to get beyond flattish EBIT trends," Stifel said in a note following the results statement.

Constellation reported operating profits down by 1.8% for the nine months and by 6% in the third quarter, to $407.1m and $160m respectively. Tax gains helped nine-month net profits to rise by 22% to $342m, but third-quarter profits tumbled by 25% to $105m.

Elsewhere in the business, Constellation's joint-venture with Grupo Modelo, Crown Imports, reported net sales down by 12%  in the third quarter, to $540.5m, faced with a high comparative figure in the same period of last year. Crown's nine-month beer sales rose by 2% to $1.94bn. In spirits, Svedka vodka registered double-digit depletion growth in the third quarter.