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Less May Mean More for the Wine Industry

Mondavi's upbeat earnings report and a smaller grape harvest may signal a turnaround for the state's vintners.

October 24, 2003|Jerry Hirsch | Times Staff Writer

The first blush of a recovery is hitting the California wine industry.

In a positive sign for the state's winemakers, Oakville-based Robert Mondavi Corp. on Thursday reported a 21% gain in quarterly profit, beating Wall Street estimates.

"As we look ahead, we are cautiously optimistic that the worst may be behind us," said R. Michael Mondavi, the company's chairman.

For the last few years, Mondavi and others in the state's $14-billion wine trade have been battling intense competition from imports, a surplus of grapes and a slow economy. Now, Mondavi -- the largest publicly traded California wine company, selling everything from $5 table wine to $125 reserve Cabernet Sauvignons -- is seeing some heartening trends.

For one thing, California's wine grape harvest is turning out to be the smallest in years, with 10% to 15% fewer grapes being collected than last year's take of roughly 3 million tons.

"That shortfall will be large enough to chew into about half of the surplus," said Mondavi Chief Executive Gregory Evans.

Three years of excess have created a glut of wine, driving down retail prices and wineries' profits. This year, the supply of Merlot and Chardonnay appears to be contracting, although stocks of Cabernet Sauvignon and Pinot Noir remain high.

Moreover, there are hints that sales of so-called extreme-value wines, such as the $2-a-bottle Charles Shaw brand sold by Trader Joe's grocery stores, may be slowing.

A review of tax records for California wine shipments showed that sales of $2 wines fell to a monthly total of 325,000 cases in August. That was a 46% drop from the average 600,000 cases shipped during each of the seven preceding months, according to consulting firm Gomberg, Fredrikson & Associates. Charles Shaw makes up about 85% of the category.

"It may be that people's closets are full," said Harvey Posert, spokesman for Charles Shaw producer Bronco Wine Co.

A Trader Joe's spokesman said its stores had not seen a decline in Charles Shaw sales. He said the dip in shipments may indicate a change only in the size of the inventory at the Monrovia-based retailer's warehouse.

Around the country, an uptick in the economy and business travel is giving winemakers a boost. Evans said Mondavi saw improved sales of its wines in restaurants and bars, which account for about 20% of the company's business.

All of those factors added up to what Goldman Sachs analyst Marc Cohen called "encouraging signs."

Still, Cohen wrote in a report to investors that he remained "somewhat cautious" about Mondavi and the industry.

He added that he wouldn't be plowing more money into wine stocks until he saw "either confirmation of improvement or a pullback in share prices."

At Mondavi, net income rose to $9.8 million, or 60 cents a share, during its fiscal first quarter ended Sept. 30. That compared with $8.1 million, or 49 cents, a year earlier. Revenue rose 5% to $103.9 million in the latest quarter.

The results beat the consensus estimate of 51 cents a share by Thomson First Call as well as Mondavi's own guidance of 46 cents to 50 cents a share.

After the earnings announcement, Mondavi's shares climbed $2.03 to $33.22 on Nasdaq.

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