Constellation fears trouble ahead for 2008

Published: 23 July, 2008

Constellation Brands, the world's biggest wine producer, has warned investors net sales could fall by up to 14% in the next financial year as it continues to be hit by a combination of the glut of wine in Australia and intensifying private label competition in the UK.

On the day that Constellation also reported that its US distributors were cutting their stock holdings, its shares fell by almost 15% to their lowest level for more than two years.

Constellation, which owns brands such as Hardy's, Banrock Station and Robert Mondavi, said it was struggling against weak sales and falling margins in the UK. Richard Sands, chairman and chief executive, said pricing pressures had made it difficult to recover additional costs, including the annual UK duty increase'.

Britain accounts for less than 10% of Constellation's total wine sales, but Sands said the UK market's recovery from years of cheap Australian imports remained "the toughest question for Constellation". But he remained confident about the company's long-term future.

Constellation forecast net sales growth would be in the low double-digit to low teens' and that it would generate free cash flow of $155-175 million in this financial year. However, the prediction of earnings per share for the year to next February of between $1.30 and $1.40 was 21% below analysts' consensus forecasts and prompted the sharp fall in share price. Even so, analysts believe Constellation will be a major factor in the next round of wine and spirit industry consolidation as the major global groups seek to strengthen their portfolios.

Constellation predicted that the takeover of its latest acquisition, Svedka Vodka, would be completed later this month.

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