Constellation Brands Gets a Profit Buzz

In August, Constellation Brands (NYS: STZ) , maker of more than 100 brands of liquor, posted a quarterly top-line decline of 19.3% following the divestiture of the Australia and U.K. wine business. Let's circle back and take a look at how the company managed to do since then.

The numbers
Revenues declined to $635.3 million in the second quarter, but the fall in cost of goods sold was even greater at 25.5%. Net profit stood at $74.5 million, representing 51.7% growth over the year-ago quarter. That uptick was mainly due to a 20% dip in selling, managing, and administrative expenses.

Reducing corporate costs and selling off business units in Australia and the U.K. helped the company simplify its business, cut losses, and really improved margins.

Constellation has a 50% stake in Crown Holdings (NYS: CCK) , which posted 10% profit growth this quarter thanks to a variety of factors, including pricing, product mix, and volume growth in the ongoing launch of the Victoria brand. Distributor inventories for Crown are said to be better positioned as well.

In an economy where consumer confidence is dipping, Constellation Brands doesn't seem to be much affected. Management thinks consumers will still demand their liquor, in good times or bad, simply by visiting wine shops instead of expensive restaurants. Product distribution in retail stores such as Wal-Mart (NYS: WMT) is also quite significant for the summer selling period.

Domino effect
With its cash inflow of $220 million this quarter, the company managed to pay off debt totaling $244 million. Thus, the debt-to-equity ratio fell to 111% from 175% last year. Interest expenses fell to $44 million, a 9% decrease resulting from lower average borrowings. In addition, the interest coverage ratio rose slightly to 2.5, suggesting that the balance sheet, though highly leveraged, has been improving.

The Foolish bottom line
Constellation Brands seems to have its strategy in place. A simplified business and decreasing debt will help the company stay efficient and profitable. Plus, it doesn't face the brunt of weak consumer demand to the extent that other industries have felt. I think Constellation has a bright future ahead of it.

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At the time thisarticle was published Fool contributor Navjot Kaur owns no shares in the companies mentioned above.The Motley Fool owns shares of Wal-Mart Stores.Motley Fool newsletter serviceshave recommended buying shares of Wal-Mart Stores and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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