By Chris Brook-Carter and Anne Brockhoff

US spirits group, Brown-Forman, posted net income of $57.3 million for the third quarter to the end of January, up slightly from $56.3 million last year.

The company reported that earnings per share for the period were $0.84, up 2% on the previous year. However, the results were affected by non-recurring charges of around $0.06 per share, principally related to the closing of the company's crystal manufacturing plant, and were boosted by an accounting change, which benefited EPS by $0.04 per share.

Sales rose by 2% to $570.5 million. Beverage revenues also rose by 2% in the third quarter. But gross margins were under pressure due to unfavourable exchange rates, costs related to the company's supply chain initiatives and an increasingly competitive pricing environment in the wine business.

But wines and spirits operating profits still increased by 2% "due to tight control of operating expenses and the benefits of the accountancy change, FAS 142. On a constant basis and excluding the benefit from FAS 142, third quarter operating income increased 5%."

Jack Daniel's, the company's flagship spirits brand, saw depletion growth slow in the US over the year, but this was offset to some extent by strong international sales. Brown-Forman said, in particular the brand had performed well in the UK, Spain, Italy and Korea.

Southern Comfort meanwhile also saw modest depletion growth in the US, which when combined with price increases, resulted in record worldwide gross profits for the brand.

The group's wine business saw accelerating volume trends and the major brands "are up solidly year-to-date". However, Brown-Forman went on to warn that "pricing competition is intense and we expect the gross margin on our wine brands to decrease this year."

Wine Margins Squeezed by Discounting

Brown Forman said gross profit margins in its wine business were squeezed during the third quarter after a record California grape harvest in 2000 led to rising production and fierce discounting among wine makers.

"The over-capacity of grapes put pressure on industry pricing, and we're not immune to this," Brown Forman Chief Financial Officer Phoebe Wood said during a conference call with investors.

Fetzer has felt the most impact, she said. Brown Forman has so far cut prices on its biggest label by 3 percent, returning them to where they were about 18 months ago, said Lawson Whiting, director of investor relations. He declined to quantify the resulting reduction in margins.

California wines in the $6- to $11-range were most affected after the state's growers produced a record 3.3 million tones of grapes two years ago. Wine from that harvest is now making its way onto the market, and consumers drawn by lower prices are snapping it up.

Sales of Fetzer wine neared 1 million cases in the three months ended Jan. 31, putting the label on track to reach sales of almost 4 million cases for the fiscal year, Whiting said.

Still, prices aren't likely to rebound anytime soon. "We are seeing high consumer demand and high volume," Whiting said.

"But I don't think you'll see anyone raise prices next year." The company's Korbel Champaign and imported wines haven't been affected by discounting, he said. Brown Forman, based in Louisville, Ky., reported yesterday that earnings per share rose 2 percent to $0.84 during the third quarter. Net sales from wine and spirits rose 2 percent to $400.5 million.