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April 24, 2008

Housing slump drags down Fortune Brands in first quarter

Originally published by the Medill News Service, Apr. 24, 2008

Fortune Brands Inc. reported flat earnings due to a slowdown in the housing market affecting its home products business. The results underperformed analysts’ estimates, but the stock fell 2.8 percent Thursday.

For the quarter ended March 31, 2008, the Deerfield-based holding company with subsidiaries in the spirits, golf and home and hardware businesses, earned $120.5 million, or 77 cents per diluted share. The result was essentially flat compared with results the previous year when the company earned $120.2 million, or 77 cents per diluted share.

Wall Street estimated diluted per share earnings of 79 cents per diluted share, as compiled by Zacks Investment Research Inc.

The company recorded net sales of $1.81 billion in the first quarter, a drop of 5.4 percent from the previous year when the company had net sales of $1.91 billion.

The biggest contribution to the reduction in sales and the flat earnings was the slowdown in the U.S. housing market. Sales in the home and hardware segment of the business were $894.4 million, down 12.5 percent from the prior year's first quarter. Chief Financial Officer Craig Omtvedt said in the earnings conference call Thursday that the replace-and-remodel sector of that business continues to be stronger than the new construction market. He projected that operating income in the segment would be down from high single digits to low teens for the year.

The poor results in the home and hardware segment were not a surprise to Robin Diedrich, an analyst who covers the company for St. Louis-based Edward D. Jones and Co. LP. “We were expecting that segment to be the weakest. We had a decline baked in for the quarter. It was a little more than we expected,” Diedrich said.

While a company might raise prices to offset the slow sales, Fortune Brands is looking at other ways to decrease its costs and maintain margins.

“We are doing some material substitution,” CEO Bruce Carbonari said. “Pricing is getting more and more difficult unless we have a sudden rise. With the environment being what it is, it is difficult to do a price increase.”

In the spirits business, the company used the earnings conference call to emphasize its focus on building brands. Carbonari said the company is making investments in its current brands to grow organically, rather than aggressively seeking a purchase.

Fortune Brands recently lost the bidding for the purchase of the Absolut Vodka brand to rival Pernod Ricard SA. The company was praised for its unwillingness to overpay. Fortune Brands took a one-time charge in the first quarter of 3 cents per diluted share from its participation in the bidding for the brand. The company still has an agreement to distribute Absolut in the U.S. until 2012.

Jonathan Feeney, an analyst for Wachovia Capital Markets LLC, reiterated praise for the company’s fiscal responsibility on the earnings conference call. “It certainly shows some discipline on your part that you allowed someone else to pay that price for the assets,” Feeney said. Pernod paid $8.3 billion for the rights to Absolut.

The organic growth is a model that Diedrich likes for the company, even if it is hard to quantify the results.

“It is not as easy to put your finger on as ‘We are going to go out and buy X brand.’,” Diedrich said.

“I would rather see them build the brand long-term than do an acquisition. A bad acquisition can destroy returns for decades. I think it is the prudent move.”

The company saw sales gains of 8.0 percent in its golf business, helped by strong sales in the Asian markets, specifically Korea and Japan.

Despite the flat quarter, Omtvedt said the company will continue to invest in itself. He is projecting capital expenditures to be in the range of $200 million to $225 million.

“We are maintaining strategic spend for new products in the businesses. That is what we did in 2000 through 2001 and that served us well when things turned around,” Omtveldt said. “What we are not going to do is take out $1 now to protect diluted earnings per share and find out it takes $2 to put it back in later.”

Diedrich, who has a buy rating on the stock, continues to see a good outlook for the company.

“This is a long-term investment," she said.

The company forecasts its second quarter results to be lower than last year's second quarter, based on the weakness in the housing market and a late start to the golf season. Fortune Brands earned $1.48 per diluted share in that quarter and expects results to be down at a rate between the high single digits and the mid-teens. The company also narrowed its forecast for the full year.

“We’re now targeting diluted EPS before charges/gains to be in the range of flat to down at a high-single-digit rate,” Carbonari wrote in the earnings press release.

Fortune Brands stock closed Thursday, down $2.02 at $68.86, a decline of 2.8 percent from the previous day's closing price of $70.88.

This entry is tagged: business, clip, earnings, FO, Fortune Brands, Medill, Medill News Service

Posted by bmiraski at April 24, 2008 3:20 PM