The Distillers: Boiling Down 2009

By Aaron Levitt | December 30, 2009 AAA

In 2009, the consumer played a big role in how the markets turned out. While stocks were up for the year, with the S&P 500 returning nearly 20%, consumers are still tightening their purse strings. The beer and liquor producers have felt this pinch, and many have responded by trading down to cheaper alcoholic beverages. When less frequent liquor purchases are combined with decreased sales to restaurants, it's easy to see why industry wide, companies are reporting uncertainty about the sustainability and pace of any recovery.

Overall, U.S.-traded wine and spirits companies, including Fortune Brands (NYSE:FO), showed a consistent trend in their most recent quarterly reports, beating analyst forecasts, but showing earnings that were much lower than year-ago periods. Let's take a look at U.S. distillers as well as some of their overseas competitors.
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The British Giant
Diageo (NYSE:DEO) has been weathering the storm better than most thanks to the declining British pound. The company managed to eke out a 15% increase in sales during 2009 versus the previous year due to foreign currency gains. The company's $2.63 billion in profit was built on the back of its core brands: Smirnoff vodka, Captain Morgan rum and Johnnie Walker whiskey. The company also benefited from its large global portfolio of liquors at various price ranges.

Turnaround Progression
Constellation Brands' (NYSE:STZ) restructuring of its international wine business has begun to show promise and positive cash flow. In fact, the company reported solid numbers for the first fiscal half year. The company recently sold is hard cider operations for $70 million in order to focus on higher margin operations and reduce its debt load.

Increasing Guidance
With sales of its ready-to-drink, premixed cocktails surging, Brown-Forman (NYSE:BF.B) was able to capitalize on the trend of consumers drinking at home rather in bars or restaurants. Led by a 50% sales gain in Jack Daniel's ready-to-drink products and a 52% increase in Southern Comfort premixed products, the company raised its earnings outlook for the full fiscal year to $2.95 to $3.15 per share, up from prior guidance of $2.60 to $3 per share. CEO Paul Varga said Brown-Forman has weathered the past 12 months very well.

Bottom Line
The liquor industry showed improvement in 2009, but still has a long way to go. As long as the consumer sentiment remains low and spending tight, distillers' margins will continue to be squeezed. Companies that have vast brands catalogs that hit all price points are those that are most likely to emerge as winners in 2010.

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