CHICAGO Wine and spirits maker Constellation Brands Inc (STZ.N) reported a slightly better-than-expected quarterly profit on Wednesday as efforts to stabilize its business started to pay off, and its shares rose 9 percent.
Still, earnings were down as Constellation's sales and margins have suffered while the recession causes many consumers to seek out lower-priced drinks. The company sold off some less expensive brands and is cutting costs to stay competitive.
After it laid out plans to close some facilities and cut 5 percent of its workforce, or about 400 jobs, back in March, Constellation is starting to consolidate U.S. wine and spirits distribution.
The maker of Robert Mondavi wine, Svedka vodka and Black Velvet Canadian Whisky said net earnings fell to $6.5 million, or 3 cents per share, in the first quarter ended May 31 from $44.6 million, or 20 cents per share, a year earlier.
Excluding business realignment costs and other one-time items, profit dipped to 33 cents a share from 34 cents.
On that basis, analysts on average expected earnings of 32 cents per share, according to Reuters Estimates.
"Expectations have gotten quite low and there's some evidence that this focus on cost cutting is mitigating the earnings disappointments we saw last fiscal year," said Stifel Nicolaus analyst Mark Swartzberg, who rates the shares "buy."
In April, Constellation's fourth-quarter profit missed Wall Street's expectations by a penny. The company warned in March that profit for fiscal 2009 would come in lower than expected, after it already cut its forecast in January.
SVEDKA STRONG, CORONA UNDER PRESSURE
First-quarter sales fell 15 percent to $792 million, pressured by currency rate changes and the sale of brands such as Barton and Chi-Chi's premixed cocktails.
"All things considered they're doing a decent job of getting through it, when you figure just how many hurdles they have, in terms of economy, trade down, currency, all these other factors," said J.P. Morgan analyst John Faucher, who rates the shares "neutral."
Constellation's focus on certain products is paying off as brands such as Woodbridge by Robert Mondavi, Nobilo, Clos du Bois, Kim Crawford and Svedka are doing well despite the downturn, said Chief Executive Rob Sands.
On a constant currency basis, "organic" sales rose 1 percent overall, with spirits sales up 13 percent, aided by Svedka's 33 percent jump. Branded wine sales rose 1 percent but fell 1 percent in North America after rising 1 percent in the fourth quarter.
Sands said he does not expect major disruptions as the company stops working with some U.S. distributors in the consolidation. The company's initial transition will include up to 17 states representing about 50 percent of its total U.S. volume for wine and spirits, he said during a conference call.
One area analysts are keeping an eye on is the Crown Imports joint venture with Grupo Modelo GMODELOC.MX, where sales fell 5 percent. Constellation's equity earnings from its 50 percent stake in the venture, which distributes Corona beer in the United States, fell 10 percent.
Selling beer at bars, restaurants and convenience stores remains difficult but the Crown venture has seen some improvement at U.S. grocery stores, Sands said. He said it was a little too early to say how the weather -- wet and cool weather across much of the country in June -- may have affected sales.
Meanwhile, Corona has faced increased pressure from rivals such as Anheuser-Busch InBev's (ABI.BR) Bud Light Lime and Femsa's (FMSAUBD.MX) Dos Equis and Tecate.
Constellation still expects to earn $1.60 to $1.70 per share in fiscal 2010, which ends in February, compared with $1.60 in fiscal 2009.
Shares of Constellation were up 9.2 percent at $13.85 after rising to $14.19. The stock had fallen nearly 20 percent in the first half of 2009.
(Reporting by Jessica Wohl; editing by John Wallace, Maureen Bavdek, Lisa Von Ahn and Gunna Dickson)