A Toast to Constellation Brands
11/11/2009 12:00 pm EST
Vahan Janjigian, editor of Forbes Growth Investor, says the world’s largest winemaker has restructured its operations and is ready to profit from a real recovery.
Constellation Brands (NYSE: STZ) makes, distributes, and markets alcoholic beverages. North America is its largest geographic market, responsible for 71.6% of sales during the first half of fiscal 2010.
Wine is the company’s most important product, accounting for 86.3% of first-half sales. STZ markets table, sparkling, and dessert wines across multiple price points, including popular, premium, super-premium, and fine.
The company owns 18 of the top 100 best-selling table brands in the US. It also owns five to six of the top 25 brands in Canada, the UK, and Australia. Brand names include Robert Mondavi, Franciscan, Wild Horse, Simi, Estancia, Blackstone, Ravenswood, Black Box, Inniskillin, Ruffino, and Stowells.
STZ also sells vodkas and whiskeys, which generated 7.5% of first-half sales. Bulk wholesale wine and other alcoholic beverages such as cider [produced] the remaining 6.2% of revenues.
The biggest [joint venture] is Crown Imports with Mexican brewer Grupo Modelo, which has exclusive rights to export to the US market brands such as Corona Extra, Corona Light, St. Pauli Girl, and Tsingtao. Crown Imports had sales of $1.33 billion in the first half of the year. STZ’s share was $136 million, which amounted to 31.9% of earnings before interest and taxes.
Due to the economic recession, some individuals have reduced alcohol consumption, [while] others have traded down to cheaper brands. As a result, STZ ended fiscal 2009 on a weak note.
Organic sales in the fiscal fourth quarter (ending last February—Editor) fell 3% from the prior year to $735.1 million. Comparable net income was lower by 37% to $46 million, or 21 cents per share. The company also took a $354.9-million write-down.
Management implemented several restructuring initiatives aimed at simplifying the business, enhancing efficiencies, and reducing the cost structure. It [cut] the global workforce by 5%, shut certain facilities, and consolidated its distribution network. In addition, it divested certain non-core brands in order to focus on more popular and [faster-growing] brands such as Svedka and Black Velvet.
Fiscal first-quarter results were much improved, [and] fiscal [second-quarter] results were even better. Although net sales fell 8.3% year over year to $876.8 million, organic sales actually climbed 4%. The adjusted operating profit margin surged 383 basis points to 19.1% and adjusted net income jumped 21.2% to $120 million or 54 cents per share.
The company’s debt burden, which stands at $4.16 billion, poses an investment risk. However, management reduced debt by 6.1% since the beginning of the fiscal year. With an improving cost structure, greater efficiencies, and a leaner, more stable portfolio of brands, STZ is positioned to benefit from even a slight improvement in the top line.
We expect demand to pick up from the excessively low levels seen just one year ago, [and] we expect sales to climb as we head toward the holiday season. (The stock closed below $16.50 Tuesday—Editor.)