Constellation Brands Offers Dim Outlook

Shares of the wine and spirits outfit dropped sharply Thursday after it issued disappointing revenue and earnings projections

Constellation Brands (STZ) is bracing for trouble selling its wines and beverages in 2008. The U.K. market has been weak. Meanwhile, U.S. companies that distribute Constellation Brands' products are consolidating and slashing inventory. After the Fairport (N.Y.) company warned Mar. 1 that its earnings will get worse next year as sales fall, investors dumped its stock.

Constellation expects to have $1.65 to $1.70 earnings per share in the year ended Feb. 29, 2007 and year-over-year sales growth in the low double digits to low teens. Then Constellation thinks it will have $1.30 to $1.40 in comparable EPS during fiscal 2008 and a 12% to 14% sales drop. Consensus estimates had been for $1.83 per share EPS and an 11.7% sales drop in 2008, after $1.67 EPS and a 12% increase in 2007, according to the San Francisco research firm StarMine.

Investors sold the stock 16.5% to $19.60 per share on the New York Stock Exchange on Mar. 1.

Constellation Wines U.S., which includes California wineries like Robert Mondavi, is planning to cut down on distributor inventory levels during the first half of the fiscal year. As distributors continue consolidating and getting larger, they're also making their business processes more efficient and cutting down on their costs. For example, a large distributor might be able buy its inventory in bulk at lower rates than a small one.

While Constellation Brands navigates such issues, the company is also taking hits in the U.K., where low cost bulk Australian wine is available and the market has been competitive. But Constellation expects the U.K. market to eventually correct its problems and recover.

UBS analyst Kaumil Gajrawala says issues in the U.K. were not new, but appear worse than expected, according to a report from Standard & Poor's MarketScope. The analyst maintained the firm's neutral rating on the stock, given limited visibility in the near-term in the company's wine business.

Constellation continues pushing to keep up with the consolidation in the industry by expanding its own growth. For example, news hit in July of its plans for a joint venture with the Mexican beverage giant Grupo Modelo to market beer beginning in 2007. The company also completed its acquisition of the Mississauga (Ont.)-based Vincor on June 5. And on Feb. 6, Constellation announced its agreement with Guillaume Cuvelier and Belgian-based Alcofinance S.A., the owners of Svedka Vodka, to acquire the brand and related business for $384 million.

"Our confidence in Constellation's long-term growth remains strong and we continue to take actions intended to strengthen the company during increasing consolidation in the beverage alcohol industry," CEO Richard Sands said in a press release March 1. Putting his money where his mouth is, Sands allowed his company to authorize the buyback of $500 million in common stock. Sands said "repurchasing Constellation shares is an appropriate investment for us, in addition to being an excellent opportunity for available capital."

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