Constellation Beats on Bottom Line

Leading wine and spirits distributor Constellation Brands Inc. ( STZ - Analyst Report ) delivered adjusted earnings of 40 cents per share in the first quarter of fiscal 2013, surpassing the Zacks Consensus Estimate and prior-year period earnings of 39 cents. On a reported basis, the company registered earnings of 38 cents per share.

Net sales in the quarter remained almost flat at $634.8 million from the year-ago quarter. However, sales missed the Zacks Consensus forecast Estimate of $646 million. On an organic basis, net sales inched down 1% due to higher promotional costs and decreased volume, partially offset by favorable product mix.

Cost and Margin Performance

Cost of products sold remained flat year over year to $384.2 million in the quarter, and based on revenues; it remained stable at 60.5%. Consequently, adjusted gross profit and gross margin was flat with the prior-year quarter’s $250.6 million and 39.5%, respectively.

Selling, general and administrative expenses increased 4.2% to $144 million in the quarter, and based on sales, it increased 90 basis points to 22.7% from the prior-year quarter, primarily due to increased promotional and marketing expenses. Consequently, Constellation Brands' adjusted operating income decreased 5.5% to $106.6 million from $112.8 million in the year-ago quarter, resulting in a contraction of 100 basis points in operating margin to 16.8%.

Financial Position

Constellation Brands’ cash and cash equivalents as of May 31, 2012 was $69.1 million. During the quarter, Constellation generated $96.4 million of cash from operations compared with $241.3 million in the previous year. During first-quarter 2013, the company generated a free cash flow of $76.8 million compared with $220.3 million reported in the prior-year period.

During the quarter, the company repurchased 18 million shares of common stock at a cost of $383 million under its ongoing $1 billion share repurchase program. Constellation Brands expects to complete at least 50% of the new authorization in fiscal 2013.

Fiscal 2013 Outlook

The company reiterates its fiscal 2013 adjusted earnings per share guidance in the band of $1.93 to $2.03 per share compared with $2.34 in fiscal 2012. The guidance factors in an interest expense expectation in the range of approximately $210–$220 million, an approximate tax rate of 34% and weighted average diluted shares outstanding of approximately 185-190 million.

On a reported basis, the company expects earnings per share in the range of $1.89-$1.99 per share compared with $2.13 in fiscal 2012.

Moreover, the company anticipates generating a free cash flow in the range of $425 million to $475 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.