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Leading wine distributor Constellation Brands Inc. (STZ - Analyst Report) delivered an adjusted EPS of 39 cents in its first quarter ended May 31, 2011, outperforming the Zacks Consensus Estimate of 37 cents and improving by a penny from the prior-year quarters' earnings of 38 cents.

Both the reported and prior-year quarter's EPS excluded special items like inventory step-up costs, net gains/losses from its strategic business realignment initiatives and other items. Netting these items, the company reported EPS of 35 cents versus 22 cents in the year-ago quarter.

Sales in the quarter plummeted 19.3% to $635.3 million from the year-ago quarter. An organic constant currency net sales increase of 2.0% was more than offset by divestitures of the Australian and U.K. wine business and U.K. cider business. However, sales for the quarter surpassed the Zacks Consensus Estimate of $613.0 million.

In terms of geographic regions, North American net sales grew 8% year over year to $635.3 million, while Australia and Europe plunged 100.0% from the year-ago quarter due to fully divestiture of operation in this region. The increase in North American net sales was primarily driven by favorable product mix coupled with lower promotional expenses, partially offset by decline in volume.

Cost and Margin Performance 

Adjusted cost of products sold decreased 25.5% year over year to $384.1 million in the quarter primarily due to divestiture of its Australian and U.K operations, and based on revenues; it improved 500 basis points to 60.5%. Consequently, adjusted gross profit declined 7.6% to $251.2 million and gross margin expanded 500 basis points to 39.5%.

Adjusted selling, general and administrative expenses dipped 19.6% to $135.7 million in the quarter, and based on revenues, it remains flat from the prior-year quarter. Constellation Brands' adjusted operating income increased 12.3% to $177.7 million from $158.2 million in the year-ago quarter primarily driven by reduced corporate costs, improved operating results in the North American segment and divestiture of Australian and U.K businesses.

Financial Position

Constellation Brands ended the quarter with cash and cash equivalents of $13.4 million compared with $20.9 million at the end of the prior-year quarter. During the quarter, Constellation generated $241.3 million of cash from operations compared with $60.1 million in the previous year.

Free cash flow for the quarter was $220.3 million compared with $34.5 million in the prior period. Free cash flow, along with proceeds from the sale of the Australian and U.K. businesses, enabled the company to reduce its debt by approximately $244.0 million.

Fiscal 2012 Outlook

The company expects its fiscal 2012 EPS to be in the band of $1.90 to $2.00. The guidance factors in an interest expense expectation in the range of approximately $180–$190 million, an approximate tax rate of 29% and weighted average diluted shares outstanding of approximately 216 million.

Constellation Brands expects to generate $685 million to $745 million of cash from operations in fiscal 2012 and deploy $85 million to $95 million toward capital expenditure. Accordingly, the company anticipates free cash flow in the range of $600.0 to $650.0 million in fiscal 2012.

Constellation Brands is the largest wine company in the world with a strong portfolio of premium wine brands complemented by spirits, imported beer and other select beverage alcohol products. Constellation Brands competes with Foster's Group Ltd. and privately held E. & J. Gallo Winery and Jackson Family Wines.

We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock. Our long-term recommendation on the stock remains Neutral.

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