Constellation Brands Inc.’s quarterly profit shrank 21% as the wine and spirits maker’s sharply higher tax rate and increased expenses offset its stronger revenue.

Constellation has become a bigger player in Anheuser-Busch InBev NV’s $20.1 billion bid to buy out Mexican brewer Grupo Modelo SAB de CV, after the Justice Department filed an antitrust lawsuit in late January to stop the tie-up.

Constellation had been set to take Modelo’s stake in U.S. beer supplier Crown Imports LLC for $1.85 billion. But, in an effort to get the Justice Department to approve the deal, AB InBev agreed to sell an additional $2.9 billion of assets to Constellation—including the transfer of Modelo’s Piedras Negras brewery in Mexico and perpetual licensing rights in the U.S. to five Modelo brands—to help preserve Modelo as an important U.S. competitor to AB InBev.

AB InBev, the world’s largest brewer by revenue, said Friday it reached an agreement in principle with the Justice Department to resolve the suit, saying the proposed settlement would be “substantially in line” with the revised merger terms.

Investors have cheered Constellation’s acquisition plan, as they have pushed the company’s stock price higher since the deals were announced last June.

Constellation on Wednesday said it expects the Crown Imports deal will close by the end of the current quarter or “shortly thereafter.” Assuming the deal closes around that time, the company expects current-year adjusted earnings to range between $2.55 and $2.85 a share. Analysts surveyed by Thomson Reuters expected a profit of $2.78.

President and Chief Executive Rob Sands said Constellation expects current-year domestic wine and spirits volume will rise “at least in-line” with the category. Higher grape costs and marketing spending should temper operating income growth for those businesses below the projected increase in net sales, Mr. Sands said.

For the beer business, Crown is targeting depletions, or the products sold by distributors and wholesalers, and net sales growth in the low-to-mid single-digit range for the new fiscal year. Net sales at Crown jumped 5% in the latest fiscal year, though the growth eased to 1% in the fourth quarter.

For the quarter ended Feb. 28, Constellation reported a profit of $81.7 million, or 43 cents a Class A share, down from $103 million, or 51 cents a share, a year ago. Excluding restructuring, acquisition and related charges, earnings fell to 47 cents a share from 69 cents.

Net sales, which exclude excise taxes, were up 11% at $695.9 million.

Analysts expected earnings of 45 cents a share and $667 million in sales.

Gross margin narrowed to 37.6% from 39%, as input costs rose 13%.

The results were stung by a choppy tax rate, with Constellation reporting a 26.9% rate in the latest quarter compared with last year’s negative tax rate of 11.2%. The loftier tax rate led Constellation to record $25.1 million in provisions for taxes, compared with a gain of $22.5 million last year.

Source: Wall Street Journal

https://online.wsj.com/article/SB10001424127887323741004578414331551234300.html?mod=WSJ_earnings_LEFTTopHeadlines

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