Constellation Beats Estimate

Leading wine distributor Constellation Brands Inc. (STZ - Analyst Report) delivered an adjusted EPS of 76 cents in its second quarter ended of fiscal 2012, outperforming the Zacks Consensus Estimate of 66 cents and prior-year quarters' earnings of 43 cents.

Sales in the quarter plummeted 20% to $770.4 million from the year-ago quarter. An organic constant currency net sales was at par with previous year quarter. The fall in sales was due to the 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 $663.0 million.

Cost and Margin Performance 

Adjusted cost of products sold decreased 26% year over year to $407.2 million in the quarter primarily due to divestiture of its Australian and U.K operations, and based on revenues; it increased 100 basis points to 53%. Consequently, adjusted gross profit declined 10% to $283 million and gross margin expanded 70 basis points to 37%.

Adjusted selling, general and administrative expenses dipped 17% to $138.2 million in the quarter, and based on revenues, it increased 200 basis points to 18% from the prior-year quarter. Constellation Brands' adjusted operating income increased 9.0% to $145.1 million from $133.2 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 $10 million. During the quarter, Constellation generated $517.4 million of cash from operations compared with $306.1 million in the previous year.

Free cash flow for the six months period was $478 million 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 $290.0 million. During second quarter of 2012, the company repurchased 9.8 million shares of common stock at a cost of $188 million.

Fiscal 2012 Outlook

The company expects its fiscal 2012 EPS to be in the band of $1.92 to $2.02. The guidance factors in an interest expense expectation in the range of approximately $180–$190 million, an approximate tax rate of 27% and weighted average diluted shares outstanding of approximately 210 million.

Constellation Brands 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. (FBRWY) and privately held E. & J. Gallo Winery and Jackson Family Wines.

We currently have a Zacks #4 Rank (short-term Sell recommendation) on the stock. Our long-term recommendation on the stock remains Neutral.

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