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Driven by the acquisition of Crown Imports business last year, Constellation Brands Inc. (STZ - Analyst Report) posted a year-over-year rise of 74.6% in its third-quarter fiscal 2014 adjusted earnings per share, which came in at $1.10. Moreover, quarterly earnings surpassed the Zacks Consensus Estimate of 91 cents per share.

On a reported basis, the company registered earnings of $1.07 per share, against 58 cents in the comparable year-ago quarter.

Net sales in the quarter soared 88.2% year over year to $1,443.3 million and surpassed the Zacks Consensus Estimate of $1,386.0 million. The year-over-year increase in top line was primarily attributable to complete consolidation of the Crown Import business. The company’s beer segment revenues increased 21% to $661.6 million from $547.4 million in the comparable year-ago quarter.

On an organic basis, the company’s wine and spirits sales rose 3.0% year over year as the benefit of wine volume growth was partially offset by increased promotional expenses and lower spirits volume.

Cost and Margin Performance

Adjusted cost of products sold surged 79.3% year over year to $811.6 million in the quarter primarily due to inclusion of the U.S. beer business acquired last year. However, based on net sales, adjusted cost of product sold fell 280 basis points (bps) to 56.2%.

Adjusted gross profit for the quarter surged 95% year over year to $611.9 million. Consequently, adjusted gross profit margin expanded 140 bps to 41.0%.

Adjusted selling, general and administrative (SG&A) expenses climbed 67.7% to $236.9 million in the quarter. Based on sales, it contracted 200 bps to 16.4% from the comparable prior-year quarter on the back of effective cost management.

Due to consolidation of the newly acquired businesses, Constellation Brands' adjusted operating income increased more than twofold to $375.0 million from $172.9 million in the year-ago quarter. Adjusted operating margin expanded 350 bps to 26.0% primarily driven by improved gross profit margin and the benefit of leveraged SG&A expenses.

During the quarter, the company’s interest expense rose nearly 46.0% to $89.6 million, primarily due to increased average borrowings to finance beer business, partially offset by lower interest due to partial debt redemption.

Financial Position

Constellation Brands, which competes with Boston Beer Co. Inc. (SAM - Snapshot Report), Beam Inc. (BEAM) and Molson Coors Brewing Company (TAP - Analyst Report) ended the quarter with cash and cash investments of $65.2 million. During the first three quarters of fiscal 2014, Constellation Brands generated $629.1 million of cash from operations. During the third quarter, Constellation Brands repaid $166.0 million worth of debt. As of Nov 30, 2014, the company had $6,897.0 million of long-term debt (excluding current maturities).

Fiscal 2014 Outlook

Considering the positive impact from the recent acquisition of Grupo Modelo and strong third-quarter results, management raised its guidance for fiscal 2014. Constellation Brands now expects fiscal 2014 adjusted earnings to be in the range of $3.10–$3.20 per share, compared with $2.80–$3.10 projected earlier. On a reported basis, earnings per share in fiscal 2014 are now anticipated to be in the range of $9.65–$9.75 versus the former forecast of $9.30–$9.60.

Certain factors were considered before providing the guidance, such as an interest expense expectation in the range of approximately $325.0 million, an approximate tax rate of 31% and weighted average diluted shares outstanding of approximately 198 million.

Moreover, the company is expected to incur capital expenditures in the band of $200–$230 million. Additionally, the company now hopes to generate free cash flow in the range of $525–$575 million versus its previous forecast of $475–$575 million.

Constellation Brands currently carries a Zacks Rank #2 (Buy).

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