Constellation Brands' 3Q Beats

Leading wine and spirits distributor Constellation Brands Inc. (STZ - Analyst Report) delivered adjusted earnings of 63 cents per share in the third quarter of fiscal 2013, surging over 21% from the year-ago quarter’s earnings. Moreover, quarterly earnings exceeded the Zacks Consensus Estimate of 55 cents.

On a reported basis, the company registered earnings of 58 cents per share compared with 52 cents in the year-ago quarter. The year-over-year improvement in the bottom line was primarily driven by increased top line, improved margins and lower tax rate.

Net sales in the quarter increased 9% to $766.9 million from the year-ago quarter, surpassing the Zacks Consensus Estimate of $744 million. On an organic basis, the company’s wine and spirits sales grew 6% year over year. Net sales gained on the back of higher volumes and better product mix, partially offset by elevated promotional costs.

Cost and Margin Performance

Cost of products sold escalated 9.2% year over year to $456.1 million in the quarter; however, based on revenues, it contracted 16 basis points (bps) to 59.47%. Adjusted gross profit increased 10.8% to $314.2 million and gross margin expanded 50 bps to 41.0%.

Adjusted selling, general and administrative (SG&A) expenses augmented 25.4% to $141.3 million in the quarter. Based on sales, it increased 234 bps to 18.42% from the comparable prior-year quarter, primarily due to increased promotional and marketing expenses incurred to support innovation initiatives at the company’s U.S. wine and spirits business.

Constellation Brands' adjusted operating income increased 13.2% to $172.9 million from $152.8 million in the year-ago quarter, leading to an expansion of 70 bps in operating margin to 22.5%.

During the quarter, the company’s interest expense soared 32.6% to $61.4 million, primarily driven by the hiked average borrowings as well as increased average interest rates. Effective tax rate in the quarter was 27.8% versus 36.9% in the year-ago quarter.

Financial Position

Constellation Brands’ cash and cash investments as of November 30, 2012 was $200.5 million. During the nine months of fiscal 2013, Constellation Brands generated $389.0 million of cash from operations compared with $640.8 million in the previous-year period. Through the same time period, the company generated a free cash flow of $336.8 million compared with $586.7 million reported in the prior-year period.

Fiscal 2013 Outlook

Constellation Brands raised its fiscal 2013 adjusted earnings guidance to $2.10–$2.20 per share compared with earlier projection of $2.00-$2.10 per share. Certain factors were considered before providing the guidance, such as an interest expense expectation in the range of approximately $225–$235 million, an approximate tax rate of 27% and weighted average diluted shares outstanding of approximately 190 million. Moreover, the company anticipates generating a free cash flow in the range of $450–$500 million.

On a reported basis, the company expects earnings per share in the range of $1.97–$2.07 per share compared with $2.13 in fiscal 2012. Earlier, the company was expecting earnings in the range of $1.87–$1.97 per share.

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 Rank #2 on the shares of Constellation Brands, implying a short-term Buy rating on the stock.