* Q1 EPS ex-items 38 cents vs Street view 35 cents
* Net sales dip 0.5 pct to $787.5 mln
* Analysts say lower taxes masked margin pressure
* Raises 2011 outlook to reflect share buyback benefit
* Shares fall as much as 4 percent (Adds analyst and executive comment, details on promotional spending and wine trends)
By Martinne Geller
NEW YORK, July 1 (Reuters) - Constellation Brands Inc (STZ.N) reported higher-than-expected quarterly profit on Thursday, but a lower tax rate masked profit erosion from increased promotional spending, sending shares in the wine and spirits company down as much as 4 percent.
Without the benefit of certain tax items, profit would have fallen short of expectations, analysts said. The company, which expects to increase promotional spending around its top U.S. brands this year, also raised its earnings forecast for the full year ending February 2011 but said it was only to reflect the impact of share repurchases.
The world’s largest branded wine company had seen its sales pressured as the recession led people to cut back on dining out, but the latest results show consumers might be warming up.
“Guidance implies that company and industry trends will remain challenging throughout fiscal year 2011,” UBS analyst Kaumil Gajrawala said in a research note. But he also said Constellation should start to see a turnaround in the second half of the year.
The maker of Robert Mondavi wine and Svedka vodka said net income was $49.1 million, or 22 cents per share, in its fiscal first quarter that ended on May 31, up from $6.5 million, or 3 cents per share, a year earlier.
Excluding one-time items, it earned 38 cents per share, topping analysts’ average estimate of 35 cents, according to Thomson Reuters I/B/E/S.
The company said results were helped by a quarterly tax rate of 24 percent, down from 39 percent in the year-earlier period. The lower rate was due to the “favorable outcome of various tax items,” it said.
D.A. Davidson analyst Timothy Ramey said sales saw some benefit from people starting to return to restaurants.
“We are seeing the swing voter, the restaurant diner, come back,” Ramey said. “When people eat away from home, they tend to have slightly more expensive taste.”
Constellation executives said hard-hit sales at U.S. restaurants and bars appear to be flattening, adding that they hope to see them tick up before the end of calendar 2010.
When budget-conscious consumers pulled back on meals away from home, retail sales of wine, beer and spirits benefited. Recently, major supermarket chains like Safeway Inc SWY.N have said they are seeing shoppers trade up to premium wines.
Constellation’s overall quarterly net sales dipped 0.5 percent to $787.5 million, hurt by the divestitures of its British cider and value spirits businesses.
Promotional spending contributed to profit erosion during the quarter. Executives said the first-quarter outlay was higher than it would be for the remainder of the year and that Constellation will focus its promotional efforts on its top 15 brands, which account for about 75 percent of U.S. profits.
Equity income from its joint venture with Mexico’s Grupo Modelo GMODELOC.MX, which imports beers like Corona into the United States, fell 14 percent as the venture’s sales fell 3 percent.
The venture faces pressure from other imported beers and lower-priced domestic beers, which have grown more attractive to price-conscious consumers.
Constellation expects to earn $1.63 to $1.78 per share for fiscal 2011, which began on March 1, up from its prior view of $1.53 to $1.68. It said the new forecast reflected the impact of a $300 million accelerated stock buyback it entered into in April.
The company said it was on target to achieve free cash flow of $350 million to $400 million for the full year.
Constellation shares were down 16 cents, or 1 percent, at $15.46 in afternoon trading on the New York Stock Exchange after falling as much as 4.2 percent earlier in the session. (Reporting by Martinne Geller and Lisa Baertlein in Los Angeles; Editing by Derek Caney, Dave Zimmerman and John Wallace)