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Constellation Brands Inc. is a leading international producer and marketer of beverage alcohol brands with a broad portfolio across the wine spirits and imported beer categories. The Company is the largest multi-category supplier of beverage alcohol in the United States; a leading producer and exporter of wine from Australia and New Zealand; and both a major producer and independent drinks wholesaler in the United Kingdom. Well-known brands in Constellation's portfolio include: Corona Extra Pacifico St. Pauli Girl Black Velvet and Fleischmann's. Constellation Brands Inc. has a market cap of $3.48 billion; its shares were traded at around $16.42 with a P/E ratio of 9.39 and P/S ratio of 0.95. Constellation Brands Inc. had an annual average earning growth of 12.4% over the past 5 years. Highlight of Business Operations: In March 2009, the Company sold its value spirits business for $336.4 million, net of direct costs to sell. The Company received $276.4 million, net of direct costs to sell, in cash proceeds and a note receivable for $60.0 million. The Company retained certain mid-premium spirits brands, including SVEDKA Vodka, Black Velvet Canadian Whisky and Paul Masson Grande Amber Brandy. This transaction is consistent with the Company’s strategic focus on premium, higher growth and higher margin brands in its portfolio. In connection with the classification of the value spirits business as an asset group held for sale as of February 28, 2009, the Company recorded a loss of $15.6 million in the fourth quarter of fiscal 2009, primarily related to asset impairments. In the first quarter of fiscal 2010, the Company recognized a net gain of $0.2 million, which included a gain on settlement of a postretirement obligation of $1.0 million, partially offset by an additional loss of $0.8 million. This net gain is included in selling, general and administrative expenses for Six Months 2010 on the Company’s Consolidated Statements of Operations.
In June 2008, the Company sold certain businesses consisting of several California wineries and wine brands acquired in the December 2007 acquisition of all of the issued and outstanding capital stock of Beam Wine Estates, Inc. (“BWE”) (the “BWE Acquisition”), as well as certain wineries and wine brands from the states of Washington and Idaho (collectively, the “Pacific Northwest Business”) for cash proceeds of $204.2 million, net of direct costs to sell. In addition, if certain objectives are achieved by the buyer, the Company could receive up to an additional $25.0 million in cash payments. This transaction contributes to the Company’s streamlining of its U.S. wine portfolio by eliminating brand duplication and excess production capacity. In connection with this divestiture, the Company’s Constellation Wines segment recorded a loss of $23.2 million for Six Months 2009, which included a loss on business sold of $15.8 million and losses on contractual obligations of $7.4 million. The loss of $23.2 million is included in selling, general and administrative expenses on the Company’s Consolidated Statements of Operations.
Net sales for Constellation Wines decreased to $876.8 million for Second Quarter 2010 from $956.5 million in Second Quarter 2009, a decrease of $79.7 million, or (8%). Branded wine net sales decreased $29.7 million primarily due to an unfavorable year-over-year foreign currency translation impact of $42.5 million, partially offset by $12.8 million of branded wine growth on a constant currency basis. The branded wine growth was due largely to growth in U.S. branded wine net sales in connection with the Company’s U.S. distributor consolidation initiative. The net sales benefit received from the U.S. distributor consolidation initiative, which is estimated to be approximately $40 to $50 million, includes both volume growth and favorable product mix shift primarily from timing of shipments in Second Quarter 2010. The timing benefit received in Second Quarter 2010 is expected to have an unfavorable impact on sales in the U.S. branded wine portfolio in the second half of fiscal 2010. The Second Quarter 2010 timing benefit was partially offset by a decrease in net sales associated primarily with the remaining U.S. branded wine portfolio. Spirits net sales decreased $44.2 million primarily due to a decrease in net sales of $65.3 million in connection with the divestitures of the value spirits business and the Canadian distilling facility, partially offset by growth within the retained spirits brands which was driven largely by volume growth of SVEDKA Vodka. Other net sales decreased $5.8 million primarily due to an unfavorable year-over-year foreign currency translation impact of $8.8 million.
The Company’s gross profit increased to $309.6 million for Second Quarter 2010 from $305.8 million for Second Quarter 2009, an increase of $3.8 million, or 1%. This increase was primarily due to a decrease in unusual items of $38.7 million and an increase in the U.S. branded wine portfolio gross profit of $10.4 million, partially offset by a decrease in gross profit of $22.3 million related to the divestitures of the value spirits business and the Canadian distilling facility and a decrease in gross profit on a constant currency basis in the Australian and U.K. businesses of $18.6 million. The decrease in unusual items, which consist of certain costs that are excluded by management in their evaluation of the results of each operating segment, resulted primarily from inventory write-downs of $47.6 million in Second Quarter 2009 associated with the Company’s Australian Initiative. The increase in the U.S. branded wine portfolio gross profit was driven by the net sales increase resulting from the Company’s U.S. distributor consolidation initiative combined with the lower U.S. promotional spend. The decrease in the Australian and U.K. gross profit was due largely to the flow through of higher Australian calendar 2008 harvest costs and an unfavorable mix of sales towards lower margin products.
Selling, general and administrative expenses decreased to $167.8 million for Second Quarter 2010 from $225.2 million for Second Quarter 2009, a decrease of $57.4 million, or (25%). This decrease is due to a decrease of $50.5 million in the Constellation Wines segment, a decrease of $5.8 million in the Corporate Operations and Other segment, and a slight decrease in unusual costs, which consist of certain items that are excluded by management in their evaluation of the results of each operating segment. The decrease in the Constellation Wines segment’s selling, general and administrative expenses is primarily due to decreases in general and administrative expenses of $22.8 million, selling expenses of $15.9 million and advertising expenses of $11.8 million. These decreases are largely attributable to (i) an overlap of prior year losses on foreign currency transactions; (ii) a favorable year-over-year foreign currency translation impact; (iii) the divestiture of the value spirits business; (iv) cost savings in connection with the Company’s various restructuring activities; and (v) a planned reduction in marketing and advertising spend. The decrease in the Corporate Operations and Other segment’s selling, general and administrative expenses is due to a decrease in general and administrative expenses resulting primarily from lower insurance costs and reduced consulting service fees.
Net sales for Crown Imports decreased to $693.0 million for Second Quarter 2010 from $732.1 million for Second Quarter 2009, a decrease of $39.1 million, or (5%). This decrease resulted primarily from lower volumes within the Crown Imports Mexican beer portfolio as challenging economic conditions have negatively impacted on-premise and convenience store channels and have resulted in some consumer shift to lower-priced beers. Crown Imports gross profit decreased $10.3 million, or (5%), primarily due to these lower sales volumes. Selling, general and administrative expenses decreased $6.2 million, or (9%), primarily due to a decrease in advertising spend. The combination of these factors were the main contributors to the decrease in operating income of $4.1 million, or (3%).
Read the The complete ReportSTZ is in the portfolios of John Rogers of ARIEL CAPITAL MANAGEMENT LLC, David Dreman of Dreman Value Management.
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