Golden State Vintners Harvests Bitter Fruit of Its Too-Rosy Forecasts

Golden State Vintners (VINT), the canary in the wine industry's coal mine, took a header off its perch this week. The shares dove after the company said fiscal 1999 earnings would fall far short of estimates, coming in at 70 to 75 cents a share, compared with the consensus estimate of about 98 cents.

The fragile state of the stock -- it was around 6 3/8 Friday, down from its initial public offering at 17 last July -- prompted Golden State to hire Goldman Sachs (GS) "to assist it in exploring strategic and financial alternatives to enhance shareholder value," according to a June 28 press release.

In other words, it's the beginning of a distress sale. And the circumstances that have prompted it raise serious questions about Golden State's use of unrealistic financials in its prospectus. Golden State Vintner officials had no comment.

Amazingly, both the company and beverage analysts claim to have been taken by surprise, despite the fact that one of the drivers of the earnings disappointment -- dropping bulk wine prices as a result of oversupply -- was apparent a year ago.

But Golden State's June 28 press release quoted President Jeffrey O'Neill as saying, "Due to unforeseen conditions in the California premium bulk-wine spot market, the company has continued to experience softness in the pricing of its bulk wine sales."

The conditions were only "unforeseen" because the company -- and, indeed, the whole industry -- just didn't want to see the numbers on new vineyard acreage and production. Over the past year, close to a dozen Drinks & Diversions columns have pointed out that newly planted vineyards were producing wine far faster than the market could absorb it, and that dropping prices -- both retail and wholesale -- would inevitably follow, as they have in every previous oversupply period.

To be sure, anything can be unforeseen if you choose to ignore the numbers. As recently as early May, D&D pointed to Golden State as the company most likely to be the first to suffer from the coming glut. D&D noted then that the company's earnings were getting slammed by falling bulk-wine prices from excess inventory, a result of overplanting of some vineyards while inclement weather was causing both vineyard yields and processing income from other vineyards to fall.

Nonetheless, companies and analysts kept dreaming about consumption increases they claimed would keep up with production, something that hasn't happened. The latest InfoScan sales statistics from Information Resources show that for the 52-week period ended April 25, consumption of domestic wine declined 1.4% while import consumption surged 11.6%. Increased import market share only aggravates the supply situation by decreasing the domestic market for the U.S. harvest.

For what it's worth, analysts like Banc of America Securities' David Goldman and companies such as Beringer (BERW), which fawned over Information Resources numbers in its prospectus, have tried to distance themselves from InfoScan, claiming that the numbers leave out too much of their sales. But privately held Kendall-Jackson, which has a brand portfolio that closely matches Beringer's, contends that Information Resources numbers are reliable.

Because of the vast number of new vineyards, Golden State and the industry find themselves in a paradoxical position in which individual growers saw their 1998 yields down as much as 35%, yet the overall harvest was the second largest in history at 2.5 million tons. This figure was down just 14% from 1997's record harvest of 2.9 million tons. An average year, by comparison, lies at about 2.2 million tons. It's impossible to say how far in the ground one must stick one's head to call 1997 a "short" year or to begin trying to tag 1999 with the same misleading label.

But that seems to be precisely what Scott Scheid, chief operating officer of Scheid Vineyards (SVIN), said in a June 10 press release. Commenting on this year's relatively cool spring temperatures, he said, "Our experience and conversations with other growers throughout the state leads us to believe that the 1999 harvest may produce an average to below-average crop." Such comments lead many people to think Scheid and the other growers mean the whole harvest when in reality they're referring only to their own vineyards.

Indeed, this is a very confusing situation. Investors looking for the truth to cover their behinds should realize that -- just as in 1998 -- when one grower says he's going to be below expectations for his harvest, it doesn't mean the whole harvest will be down.

For a dose of reality, we should listen to Barry Bedwell, president of California's Allied Grapegrowers, the largest vineyard cooperative. Bedwell estimates that even if individual growers are down because of the weather, the 1999 harvest is likely to come in at 2.7 million to 2.8 million tons.

All of this is vital to Golden State Vintners, which has 9,600 acres of its own vineyards and produces wine under contract for scores of other customers. While California heads for another record or near-record harvest, Golden State finds that revenue from its own grape sales are down and that it faces smaller contracts for processing the similarly diminished crops of its customers -- all of this when the overall price of wine is falling.

It seems now that Golden State Vintners created its own earnings expectations and share-price problems when it went public last year with numbers based on a fluke: a record 1997 harvest at a time when grape and bulk wine prices hadn't started to fall.

What's certain is that whether Golden State is acquired or continues independently, the company and the rest of the industry need to take a solid look at the facts and stop knocking investors around with numbers that wouldn't hold even an ounce of Chardonnay.

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