Constellation Brands Misses

Leading wine distributor Constellation Brands Inc. (STZ">STZ) delivered an adjusted EPS of 50 cents in the third quarter of fiscal 2012, missing the Zacks Consensus Estimate of 52 cents and prior-year earnings of 66 cents.

Sales in the quarter dropped 27% to $701 million from the year-ago quarter. The fall was due to the divestitures of the Australian and U.K. wine businesses. Sales also missed the Zacks Consensus forecast of $718.0 million.

The company’s organic constant currency net sales decreased 8% due to a decline in volume that stemmed from the overlap of distributor inventory build in the third quarter of fiscal 2011 as part of the U.S. distributor consolidation initiative.

Cost and Margin Performance 

Adjusted cost of products sold decreased 32% year over year to $417 million in the quarter, and based on revenues; it decreased 400 basis points to 59.5%. Consequently, adjusted gross profit declined 20% to $283.7 million and gross margin increased 400 basis points to 40.5%.

Adjusted selling, general and administrative expenses improved 26% to $130.9 million in the quarter, and based on revenues, it increased 40 basis points to 18.7% from the prior-year quarter. Constellation Brands' adjusted operating income declined 13% to $152.8 million from $176.3 million in the year-ago quarter due to lower volume in North America, partially offset by lower corporate expenses.

Financial Position

Constellation Brands’ cash and cash equivalents as of November 30, 2011 was $55.8 million. During the nine months ended November 30, 2011, Constellation generated $640.8 million of cash from operations compared with $369.4 million in the previous year.

Free cash flow for the nine-month period was $587 million. This enabled the company to reduce debt, fund stock repurchases and acquisitions.

During the third quarter, the company repurchased 5.2 million shares of common stock at a cost of $94 million, summing up to a total share repurchase of 15 million shares at a cost of $281 million in the nine months of fiscal 2012.

Fiscal 2012 Outlook

The company expects its fiscal 2012 adjusted EPS in the band of $2.00 to $2.10, compared to $1.91 in fiscal 2011. The guidance factors in an interest expense expectation in the range of approximately $180–$185 million, an approximate tax rate of 27% and weighted average diluted shares outstanding of approximately 209 million.

On a reported basis, the company expects EPS in the range of $1.96-$2.06, compared to $2.62 in fiscal 2011.

Constellation Brands’ third quarter release points to a $100 million growth in its free cash flow target for fiscal 2012, bringing the guidance to a range of $700 million to $750 million.

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 BEAM Inc. (BEAM - Snapshot Report) and privately held E. & J. Gallo Winery and Jackson Family Wines.

We currently have a Zacks #3 Rank (short-term Hold rating) on the stock. Our long-term recommendation on the stock remains Neutral.

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