Wine and spirits maker Constellation Brands, Inc. (STZ,STZ-B) on Thursday reported a profit for the second quarter compared to a loss in the year-ago quarter, as the prior year had higher restructuring charges and impairment of intangible assets.
On an adjusted basis, earnings per share increased 20% and significantly topped analysts' expectations. Further, the maker of Robert Mondavi wines also reaffirmed its earnings forecast for the full year 2010.
With cost-conscious customers turning to cheaper brands in the recession-hit economy, the company's low-priced products may have witnessed good movement in the just concluded quarter. Due to the same reason, sales of Constellation Brands' higher-priced brands may have suffered leading to a sales drop of 18% in the second quarter.
In a statement, president and chief executive officer, Rob Sands said, "Our performance in the second quarter demonstrates that we are on track to achieve our full-year goals. We are focused on driving organic growth, building must-have brands that return the greatest profits and creating efficiencies for long-term sustainable growth. Our initiative to consolidate distribution in the U.S. is nearly complete and we anticipate that this effort will be a major catalyst for future organic brand growth."
Second Quarter Results
The Victor, New York-based world's largest wine company reported net income of $99.7 million or $0.45 per share for the second quarter, compared to a net loss of $22.7 million or $0.11 per share in the prior-year quarter.
The results for the latest quarter include $18.7 million of strategic business realignment costs and $1.6 million of inventory set-up costs, while the year-ago quarter included $114.9 million of strategic business realignment costs, $2.7 million of inventory set-up costs, and $4.1 million of other costs.
On a comparable basis, non-GAAP net income for the quarter increased about 21% to $120.0 million or $0.54 per share from $99.0 million or $0.45 per share in the year-ago quarter. On average, eight analysts polled by Thomson Reuters expected the company to report earnings of $0.41 per share for the second quarter. Analysts' estimates typically exclude special items.
Total net sales for the quarter declined 8% to $876.8 million from $956.50 million in the same quarter last year, but topped seven Wall Street analysts' consensus estimate of $834.21 million.
Constellation Brands attributed the decline in sales primarily to the impact of currency exchange rate fluctuations, and the impact of the value spirits divestiture. On a constant currency basis, organic sales grew 4%.
In January, the company sold its value spirits business, including brands like Fleischmann's, to Sazerac Co. for $274 million
Among Constellation Brands' peers, Louisville, Kentucky-based Brown-Forman Corp. (BF-A, BF-B) reported earlier in the month a 38% rise in net profit for the first quarter, helped by lower operating expenses, even as revenues declined 7% from last year. The company also reiterated its earnings forecast for fiscal year 2010.
UK-based liquor maker Diageo plc (DEO,DGE.L) said last month that profit for 2009 increased from last year, helped by lower taxation, while pre-tax profit declined from the previous year. Sales rose 15% benefited mainly by growth in vodka, rum, tequila and beer categories.
Segmental Details
Branded wine net sales for the second quarter declined 4% to $752.4 million from $782.1 million in the year-ago quarter. Organic net sales on a constant currency basis increased 2% overall, with a 3% increase in North America, 5%growth in Australia/New Zealand and a 5% decline in Europe.
Total spirits net sales dropped 41% to $64.9 million from $109.1 million in the prior-year quarter. However, organic net sales increased 49% for the quarter, primarily led by SVEDKA Vodka. "We are extremely pleased at the continued success of the SVEDKA brand which is performing well at national chains, control states and on-premise," Sands said.
Geographically, net sales from North America declined 7% year-over-year to $622.7 million, while the fall was 14% in Europe to $164.0 million, and 9% in Australia/ New Zealand net sales to $90.1 million.
Other Metrics
Operating income for the second quarter climbed to $138.6 million from $21.5 million in the prior-year quarter. On a comparable basis, operating income increased year-over-year to $167.5 million and operating margin increased 380 basis points to 19.1%.
Gross margin for the second quarter rose 330 basis points to 35.3% from last year's 32.0%, and comparable gross margin edged down 50 basis points to 37.1% from 37.6% a year ago. Selling, general and administrative expenses declined to $167.8 million from $225.2 million in the year-ago quarter.
The company ended the second quarter with cash and cash equivalents of $19.7 million, compared to $24.9 million at end of the prior-year quarter.
The company has traditionally focused on acquisitions to bolster growth, which partly contributed to an increase in its debt. Although Constellation Brands has been trying to raise cash by way of disposal of businesses and cut costs, the company's debt position is still a concern for investors. However, the company has decreased its debt by more than $155 million during the second quarter, by $270 million year-to-date, and by more than $1 billion since the beginning of fiscal 2009.
Fitch Solutions said on Tuesday that the general slowdown in the U.S. consumer products sector is creating some headwinds for Constellation Brands as it tries to reduce its debt. The company has managed to pay off some of its debt from disposals, which has led to a fall in its credit default risk. ''While Constellation's CDS spreads continues to tighten, their rising liquidity reflects continued uncertainty for their outlook on sales,'' the firm noted.
Half Yearly Highlights
For the first six months, Constellation Brands' reported net income of $106.2 million or $0.48 per share, higher than $21.9 million or $0.10 per share in the prior-year period.
On a comparable basis, non-GAAP net income rose to $192.7 million or $0.87 per share from $172.6 million or $0.79 per share in the year-ago period.
Total net sales for the year-to-date period declined to $1.67 billion from $.89 billion in the same period last year.
Looking Ahead..........
"The macroeconomic environment remains challenging but we are beginning to see some signs of stabilization. Powered by a strong portfolio of brands which includes Robert Mondavi, Ravenswood, Blackstone, Kim Crawford and SVEDKA, we believe we have the right strategies in place to organically grow the business. We intend to continue to reduce borrowings, improve free cash flow and optimize return on invested capital. Our expectations for the full year remain unchanged," Sands added.
For fiscal 2010, Constellation Brands continues to expect earnings, on a reported basis, in a range of $0.97 to $1.07 per share, including about $0.63 per share of strategic business realignment and inventory set-up costs.
On a comparable basis, earnings are still anticipated to be between $1.60 and $1.70 per share. Analysts expect the company to report earnings of $1.63 per share for fiscal 2010, with estimates ranging between $1.57 and $1.68 per share.
For fiscal 2009, the company reported a loss of $1.40 per share, and comparable earnings of $1.60 per share.
Constellation Brands also continues to target fiscal 2010 free cash flow in the range of $230 million to $270 million.
Stock Quote
In Thursday's regular trading session, STZ is currently trading at $15.64, up $0.49 or 3.23% on a volume of 4.49 million shares. In the past 52-week period, the stock has been trading in a range of $10.66 to $21.67.
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.