Constellation Tops EPS, Lags Rev - Analyst Blog

Leading wine distributor Constellation Brands Inc (STZ) delivered an adjusted EPS of 35 cents in its fourth quarter ended February 28, 2011, outperforming the Zacks Consensus Estimate of 26 cents and  improving 30% from 27 cents in the prior-year quarter.

Both the reported and prior-year quarter's EPS excluded special items like inventory step-up costs, net gains/losses from its strategic business realignment initiatives and other items. Netting these items, the company reported EPS of $1.32 versus a loss per share of 23 cents in the year-ago quarter.

Sales in the quarter inched up 0.9% to $715.3 million from the year-ago quarter. A 10% organic constant currency net sales increase was offset by divestitures of the Australian and U.K. wine business and U.K. cider business. However, sales for the quarter fell short of the Zacks Consensus Estimate of $725 million.

In terms of geographic regions, North American net sales grew 17% year over year to $580.1 million, while Australia and Europe slipped 37% to $135.2 million from the year-ago quarter.

Cost and Margin Performance 

Adjusted cost of products sold increased 12% year over year to $254.9 million in the quarter, and based on revenues; it improved 360 basis points to 64.4%. Consequently, adjusted gross profit upped 12% to $254.9 million and gross margin expanded 360 basis points to 35.6%.

Adjusted selling, general and administrative expenses dipped 1% to $151 million in the quarter and, based on revenues, improved 30 basis points to 21% year over year. Constellation Brands' adjusted operating income increased 39.2% to $103.7 million from $74.5 million in the year-ago quarter primarily driven by U.S. volume growth in the North America segment.

Fiscal 2011 Performance

Constellation Brands' adjusted EPS for fiscal 2011 was $1.91, up 13% from the prior year and above the Zacks Consensus Estimate of $1.81.

Both years' EPS excluded special items such as inventory step-up costs, net gains/losses from its strategic business realignment initiatives and other items. Including special items, in fiscal 2011, EPS was $2.62 versus 45 cents in fiscal 2010.

Fiscal 2011 revenues dropped 1% to $3.33 billion and missed the Zacks Consensus Estimate of $3.35 billion. The decline was ascribed to the divestitures of the U.K. cider and Australian and U.K. wine businesses. Organic net sales on a constant currency basis increased 3% from the prior year.

Financial Position

The company completed the sale of its Australian and U.K. businesses during the quarter. The company retained an approximate 20% interest in the business and received net cash proceeds of about $220 million. The company recorded a net pre-tax gain of $84 million and a net tax benefit of $198 million in connection with the sale.

Constellation Brands ended fiscal 2011 with cash and cash equivalents of $9.2 million, compared with $43.5 million at the end of fiscal 2010. During the year, Constellation generated $619.3 million of cash from operations compared with $402.5 million in the previous year.

Free cash flow for the year was a record $530 million compared with $294.8 million in fiscal 2010. Free cash flow, along with proceeds from the sale of the Australian and U.K. businesses, enabled the company to fund its accelerated stock buyback for $300 million and decrease debt by approximately $600 million.

Fiscal 2012 Outlook

The company expects its fiscal 2012 EPS to be in the band of $1.90 to $2.00. The guidance factors in an interest expense expectation in the range of approximately $180-$190 million, an approximate tax rate of 29% and weighted average diluted shares outstanding of approximately 216 million.

Constellation Brands expects to generate $685 million to $745 million of cash from operations in fiscal 2012 and deploy $85 million to $95 million toward capital expenditure. Accordingly, the company anticipates free cash flow in the range of $600 to $650 million in fiscal 2012.

We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock. Our long-term recommendation for the stock remains Neutral.

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 Foster's Group Ltd. (FBRWY) and privately held E. & J. Gallo Winery and Jackson Family Wines.