Mondavi’s Profit Slips in ‘Disappointing’ Quarter

A glut of wine and a soft economy proved to be a bitter pairing for winemaker Robert Mondavi Corp., which Thursday reported a 4% drop in its fiscal second-quarter earnings and cut forecasts for the year.

The Oakville, Calif.-based vintner, whose labels include Woodbridge and Opus One, reported net income of $9.8 million, or 60 cents a share, for the period ended Dec. 31, compared with $10.3 million, or 83 cents, a year earlier. However, revenue grew 8% to $141.1 million as big harvests helped the company sell more wine.

The Mondavi results also provided a glimpse of what could be a softening of vineyard prices in California, with the company reporting a $3.1-million write-down on a Central Coast property that it is selling to an unspecified buyer.

The second quarter was “disappointing for Robert Mondavi and probably the entire wine industry,” said Chairman Michael Mondavi, whose father, Robert G. Mondavi, founded the company in 1966. “The next two quarters will likely be difficult ones.”

The company’s shares declined $1.68 on the news, closing at $28.25 on the New York Stock Exchange.

Among Mondavi’s biggest problems are aggressive price-cutting tactics by its domestic rivals and a flood of cheap imports.

With Mondavi’s competitors discounting more than the company had anticipated, it was forced to trim its earnings forecast for the year to $2.30 to $2.35 a share, down from its previous estimate of $2.55 to $2.60.

The company said it would slow shipments of wine to distributors in the second half of the year to reduce excess inventory in wholesalers’ warehouses.

“The wine market is going through some challenging times from a demand scenario as well as a supply scenario,” said Skip Carpenter, a beverage analyst with Thomas Weisel Partners in New York.

Not only are Australian and Italian wine producers taking market share away from Mondavi and others, Carpenter said, but a sluggish economy has many consumers trading down in their purchases -- choosing $6 or $7 bottles instead of offerings priced at $10 or more.

“Wine tends to be a more economically sensitive beverage than beer or soft drinks,” he said. “Consumers have become more apprehensive about their spending.”

Sales of domestic and imported wine in food and drug stores increased 3.6% by volume in the 13 weeks ended Dec. 13, but prices declined an average of 1.1%, according to consumer tracking firm AC Nielsen.

In a conference call with analysts, Mondavi said the price declines were most severe in the under-$10 category in which Woodbridge, its biggest brand, is a player.

Michael Mondavi said he hopes to boost demand for Woodbridge and his other wines by spending more on image advertising rather than engaging in discounting.

The firm also will begin distributing its wines from its Australian and Italian joint-venture partners in coming months.

However, analysts say Mondavi will have a difficult time cutting through the clutter of brands, both imported and domestic, on the market.

“It’s not a bad thing to build brand equity,” said Kristine Koerber, an analyst with WR Hambrecht & Co.

But in the near term, she added, Mondavi’s marketing efforts aren’t likely to have a big effect on sales or prices given that “you can pick up a lot of good wines for under $10.”