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Mark Vickery

Constellation Brands' Q2 Earnings Beat Estimates

STZ TAP BEAM

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Driven by consolidation of the company’s newly acquired Crown Imports business, Constellation Brands Inc. (STZ - Analyst Report) posted a year-over-year rise of 35.2% in its second-quarter fiscal 2014 adjusted earnings per share, which came in at 96 cents. Moreover, quarterly earnings surpassed the Zacks Consensus Estimate of 89 cents per share.

On a reported basis, the company registered earnings of $7.74 per share compared with 67 cents in the comparable year-ago quarter.

Net sales in the quarter rose over twofold year over year to $1,459.8 million. The year-over-year increase in top line was primarily attributable to the full consolidation of Crown Import business. The company’s beer segment revenues increased 3.4% to $815.0 million from $788.0 million in the comparable year-ago quarter.

However, on an organic basis, the company’s wine and spirits sales dropped 1.0% year over year as increased promotional expenses and lower spirits volume more than offset the benefit of volume growth of wine.

Cost and Margin Performance

Adjusted cost of products sold rose over twofold year over year to $871.2 million in the quarter primarily due to inclusion of newly acquired businesses. Consequently, adjusted gross profit for the quarter also rose two fold to $588.6 million.

However, based on net sales, adjusted cost of product sold expanded 70 basis points (bps) to 59.7%, primarily due to decline in wine and spirits gross profit resulting from higher grape costs and shift in the timing of shipments. Consequently, adjusted gross profit margin contracted 70 bps to 40.3%.

Adjusted selling, general and administrative (SG&A) expenses surged 62.1% to $236.7 million in the quarter. Based on sales, it contracted 470 bps to 16.2% from the comparable prior-year quarter on the back of effective cost management.

Due to consolidation of newly acquired businesses, Constellation Brands' adjusted operating income increased more than two fold to $351.9 million from $140.6 million in the year-ago quarter. Adjusted operating margin expanded 400 bps to 24.1% as the benefit of leveraged SG&A expenses were partially offset by reduced gross profit margin.

During the quarter, the company’s interest expense rose nearly 65.4% to $90.3 million, primarily due to increased average borrowings to finance beer business, partially offset by lower average interest rate.

Financial Position

Constellation Brands, which competes with Companhia de Bebidas Das Americas or AmBev , Beam Inc. (BEAM - Snapshot Report) and Molson Coors Brewing Company (TAP - Analyst Report) ended the quarter with cash and cash investments of $116.8 million. During the first half of fiscal 2014, Constellation Brands generated $489.0 million of cash from operations. Through the same time period, the company generated $440.0 million of free cash flow compared with $333.0 million in the prior-year period.

Fiscal 2014 Outlook

Considering the positive impact from the recent acquisition of Grupo Modelo and strong second-quarter results, management raised its guidance for fiscal 2014. Constellation Brands now expects fiscal 2014 adjusted earnings to come in the range of $2.80–$3.10 per share, compared with $2.60–$2.90 projected earlier. On a reported basis, earnings per share in fiscal 2014 are now anticipated to be in the range of $9.30–$9.60.

Certain factors were considered before providing the guidance, such as an interest expense expectation in the range of approximately $325–$335 million, an approximate tax rate of 32% and weighted average diluted shares outstanding of approximately 199 million.

Constellation Brands, which currently carries a Zacks Rank #2 (Buy), is expected to incur capital expenditures in the band of $200–$230 million. Moreover, the company hopes to generate free cash flow in the range of $475–$575 million.

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