Wine and spirits maker Constellation Brands, Inc. (STZ,STZ-B) reported Thursday a 47% year-over-year drop in profit for the third quarter, hurt by restructuring charges, lower margins and a 4% decline in quarterly net sales. Non-GAAP earnings per share for the quarter decreased 10%, but topped analysts' expectations by two cents. Further, the maker of Robert Mondavi wines also reaffirmed its non-GAAP earnings forecast for the full year 2010.
Constellation, the world's largest wine company, owns a broad portfolio of premium wine brands complemented by imported beer, spirits and other beverage alcohol products. Sales of the company's higher-priced brands have been affected by the recession-hit economy as cost-conscious customers are turning to cheaper brands.
In a statement, president and chief executive officer, Rob Sands said, "During the quarter, we continued to execute well against our strategic goals of generating cash, paying down debt and reducing costs. U.S. branded wine net sales were impacted by continuing economic challenges, higher levels of promotional spending in advance of the holiday selling season, and the expected shift of sales to the second quarter from the third quarter as part of our U.S. distributor network consolidation activities. But, we began to see improving depletion trends later in the quarter."
Third Quarter Results
The Victor, New York-based world's largest wine company reported net income of $44.1 million or $0.20 per share for the third quarter, a sharp 47% decline from $83.5 million or $0.38 per share reported in the prior-year quarter.
The results for the latest quarter primarily include $15.4 million or $0.07 per share of strategic business realignment costs, $1.2 million or $0.01 per share of inventory set-up costs, and $59.7 million or $0.27 per share of other costs. Meanwhile, the year-ago quarter included $12.3 million or $0.06 per share of strategic business realignment costs, $3.8 million or $0.02 per share of inventory set-up costs, and $32.4 million or $0.15 per share of other costs.
Excluding items and on a comparable basis, non-GAAP net income for the quarter decreased about 9% to $120.4 million or $0.54 per share from $132.0 million or $0.60 per share in the year-ago quarter.
On average, eight analysts polled by Thomson Reuters expected the company to report earnings of $0.52 per share for the third quarter. Analysts' estimates typically exclude special items.
Total net sales for the quarter declined 4% to $987.7 million from $1.03 billion in the same quarter last year, but topped seven Wall Street analysts' consensus estimate of $906.85 million.
Constellation Brands attributed the decline in sales primarily to the impact of the value spirits divestiture, partially offset by the favorable impact of year-over-year currency exchange rate fluctuations. On a constant currency basis, net sales declined 6%, and organic sales grew 2%.
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) is expected to earn $0.70 per share for the third quarter ending this month, on sales of $818.66 million.
Segmental Details
Branded wine net sales for the third quarter increased 2% to $868.1 million from $848.7 million in the year-ago quarter. Organic net sales on a constant currency basis were even with last year, with a 3% decrease in North America, 2% rise in Australia/New Zealand and a 12% growth in Europe.
Total spirits net sales dropped 54% to $51.3 million from $111.4 million in the prior-year quarter. However, organic net sales decreased only 2% for the quarter. At its Crown Imports 50-50 beer joint venture with Grupo Modelo SA, sales declined 10% amid volume declines.
Geographically, net sales from North America declined 9% year-over-year to $707.9 million, while in net sales from Europe grew 8% to $177.1 million, and net sales from Australia/ New Zealand rose 17% to $102.7 million.
Other Metrics
Operating income for the third quarter dropped 32% to $134.6 million from $197.7 million in the prior-year quarter. On a comparable basis, operating income decreased 13% year-over-year to $190 million and operating margin decreased 190 basis points to 19.3%.
Gross profit for the quarter was $344.1 million, down from $404.0 million in the year-ago quarter.Gross margin for the third quarter dropped 440 basis points to 34.8% from last year's 39.2%, and comparable gross margin was down 460 basis points to 35.4% from 40.0% a year ago.
Selling, general and administrative expenses increased to $204.3 million from $200.5 million in the year-ago quarter. Interest expense for the quarter totaled $64 million, down 18% from last year, due to lower average borrowings.
The company ended the third quarter with cash and cash equivalents of $50.3 million, compared to $181.3 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 $336 million during the third quarter, by about $600 million year-to-date, and by more than $1.3 billion since the beginning of fiscal 2009.
Nine-Month Highlights
For the nine-month period, Constellation Brands' reported net income of $150.3 million or $0.68 per share, about 43% higher than $105.4 million or $0.48 per share in the prior-year period. On a comparable basis, non-GAAP net income rose 3% to $313.1 million or $1.42 per share from $304.6 million or $1.38 per share in the year-ago period.
Total net sales for the year-to-date period declined 9% to $2.66 billion from $2.92 billion in the same period last year.
Looking Ahead..........
"The industry and our results continue to be impacted by the difficult economic climate. However, we believe we have the right strategies in place to organically grow the business as we continue to experience improving market trends in our U.S. wine and beer businesses. Overall, we remain optimistic for the future and intend to continue to work toward reducing borrowings, improving free cash flow and optimizing return on invested capital. Our comparable basis diluted EPS expectation for the full year remains unchanged," Sands added.
For fiscal 2010, Constellation Brands slashed its earnings forecast, on a reported basis, to a range of $0.79 to $0.89 per share, including about $0.81 per share of primarily strategic business realignment and inventory set-up costs, from the prior outlook of $0.97 to $1.07 per share, which included 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 $1.66 per share for fiscal 2010, with estimates ranging between $1.63 and $1.67 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. However, it is estimating full-year free cash flow to be at the upper-end of the guidance range.
Stock Quote
In Thursday's regular trading session, STZ is currently trading at $15.42, down $0.71 or 4.40% on a volume of 0.27 million shares. In the past 52-week period, the stock has been trading in a range of $10.72 to $17.56.
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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.