Declining cheap wine sales hit Constellation Brands
Declining sales of lower-priced wines have led Constellation Brands to cut its projected profit forecast for 2019.
The company said it expects net sales and operating income in wine and spirits to “decline low-single digits”.
Wines priced under $US11 are being blamed for dragging the category down.
The report said: “Focus on higher retail price points for the wine business is paying off. In the last 52 weeks, Constellation outperformed the US wine market at the greater than $11 price point with several of our Focus Brands growing double digits in IRI channels during this timeframe, including Kim Crawford, The Prisoner and Meiomi.
“Depletion performance for the below $11 price point continues to be challenged, resulting in an overall fiscal year-to-date depletion decline of 2%.”
CEO Rob Sands told CNBC the weakness in low-end wines was well-known. He noted that "that segment of the wine industry is performing very poorly" on the whole and that Constellation is working on fixing that issue in the near term.
"It's something that we identified, actually, several months ago, and we said that we were pursuing strategic alternatives for that segment of our business," he said. "In fact, we are, and expect to come to some conclusions relative to that in the near future."
Beer proved to be the strongest player in the report, with sales growing to $1.21 billion, up 16% from the previous year’s third-quarter sales of $1.04 billion.
Constellation expects net sales of beer to grow between 9-11% in 2019.
”The results delivered by our beer business mark the highlight of our third quarter performance,” said Rob Sands, retiring chief executive officer of Constellation. “The Modelo and Corona brand families continue to be on fire, fuelled by strong velocities, excellent distribution gains and highly incremental innovation. Our leadership in the high-end US beer industry positioned us to be the most significant growth contributor at retail during the quarter.”
Constellation is also dealing with expenses relating to its $4 billion investment in cannabis company, Canopy Growth.
Weak results from Canopy Growth in November brought down Constellation’s earnings, resulting in a $164 million decrease in the fair value of its investment in the third quarter.
Share price plunge a "total overreaction"
Constellation's stock dropped 12.42% following the release of the results, a new 52-week low.
Sands told CNBC it was a "total overreaction" that made the stock "an absolutely fantastic value".
However, it made the stock price so enticing that Sands and his brother, Richard Sands — who serves as Constellation's chairman of the board — bought the stock themselves, the CEO said on Wednesday while appearing on "Mad Money."
Calling the stock "way oversold," Sands told Cramer that he and his brother acquired 1.1 million shares of Constellation "in the last week or so." According to SEC filings, they each bought stock at $11.85 a share, exercising an option from 2009 that was set to expire this year. That brings their total purchase to roughly $13 million.