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Tickers in this Article: STZ, FO, CEDC, BUD, VCO
After a number of years with an acquisitive mindset, wine and spirits firm Constellation Brands (NYSE:STZ) is discovering that some of the brands it acquired are not that appealing. The company has found that its lower-end brands have little pricing power and consumers have little brand loyalty in the wine business. STZ's beer distribution business and higher-end spirits businesses are faring better, and though overall profits grew nicely during the third quarter, the company remains a work in progress as it jettisons underperforming operations.

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Third-Quarter Update
Net sales fell just over 2% to $966.4 million. Constellation sold off its U.K. cider business as well as its Australian wine business during the year and detailed that organic sales were about flat from last year's levels. North American wine sales were flat as a shift to more profitable products was offset by lower volumes. Management cited positive sales of certain brands including Robert Mondavi, Blackstone, Estancia and Simi. Australian and European sales fell 1% while organic sales in the spirits business, which consists of SVEDKA vodka that competes with Fortune Brands' (NYSE:FO) EFFEN Vodka and more moderate priced brands sold by Central European Distribution Corp. (Nasdaq:CEDC), jumped 8%.

Product costs fell 4.5% and allowed gross profits to increase about 2.3%. SG&A expenses declined 13.2% and restructuring charges declined significantly to push operating income up almost 25% to $170.1 million. Interest expense also fell and income related to an investment in Crown Imports, a joint venture with Grupo Modelo to distribute Corona and other brands in the U.S., rose sharply. This unit competes with large brewers in the U.S., including the Anheuser division of Anheuser-Busch InBev (NYSE:BUD). Overall, net income more than tripled to $139.3 million, or 65 cents per diluted share.

Outlook
For the full year, Constellation expects to report earnings between $1.53 and $1.58 per diluted share. Subtracting out charges related to divestitures, it projects earnings between $1.80 and $1.85 per share.

Bottom Line
Despite being one of the largest wine firms in the world, Constellation Brands is having a tough time sustaining consistent sales or profit growth. A string of acquisitions in years past is being right-sized down to what management believes are solid businesses that should effectively compete with other pure-play firms such as Vina Concha Y Toro (NYSE:VCO) in Chile. At this point, profit levels appear to be improving, but sustainable top-line growth will likely remain an issue for some time. The low earnings and free cash flow multiples leave upside should growth return, but most investors may be better served waiting on the sidelines for tangible signs this is occurring. (For more, see Big Brother Breweries.)

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