January 9, 2019 / 1:00 PM / in 10 days

Constellation cuts forecast as pot investment, wine business weigh

(Reuters) - Corona-maker Constellation Brands Inc (STZ.N) cut its 2019 profit outlook on Wednesday, citing weakness in wine and spirits sales and costs related to its investment in a Canadian pot producer, sending its shares down to a near two-year low.

The brewer became one of the early entrants to the growing cannabis industry in 2017 when it took a stake in Canada’s largest marijuana producer Canopy Growth (WEED.TO) that now amounts to over $4 billion.

The lowered forecast reflects an about 25 cent per share pre-tax impact to full-year profit due to higher interest expenses the company expects to pay to finance the marijuana investment that was mainly backed by debt.

Weak results from Canopy Growth in November weighed on Constellation, resulting in a $164 million decrease in the fair value of its investment in the third quarter.

At the same time, Constellation has been struggling to boost sales in its wine and spirits business, anticipating a low-single digits fall in sales in fiscal 2019.

Chief Operating Officer Bill Newlands, who will take over as chief executive officer in March, blamed the low end of its wine portfolio for weakness in the business and said the company would review its portfolio and focus more on high-end brands that sell above $11.

The company also showed signs of slowdown in its mainstay beer business with depletion growth, a measure of a distributors sales to retailers, missing analysts growth estimates in the third quarter.

Depletion growth rose 8 percent, but was below the 9 percent rise analysts had expected despite higher marketing spend for brands such as Corona Premier and Corona Familiar.

“It is clear that beer growth is slowing. The (beer business weakness) is important because Constellation has for years been able to outperform the struggling U.S. beer category,” William O’Neil’s Andrew Kessner said.

Overall, Constellation now expects earnings per share for fiscal 2019 to be between $9.20 and $9.30, down from its prior forecast of $9.60 to $9.75.

Analysts were expecting full-year earnings of $9.43 per share, according to IBES data from Refinitiv.

FILE PHOTO - Corona beers are pictured at a BevMo! store ahead of Constellation Brands Inc company results in Pasadena, California U.S., October 4, 2016. REUTERS/Mario Anzuoni/File Photo

Net sales in the third quarter rose 9 percent to $1.97 billion and topped the average estimate of $1.91 billion.

However, advertising costs coupled with higher transportation fees resulted in a 38 percent fall in third quarter profit and a 60 basis point drop in operating margins.

Shares of the company were down 10.5 percent at $154.24 in afternoon trading.

Reporting by Nivedita Balu in Bengaluru; Editing by Arun Koyyur

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