Fiscal 1998 hasn't been the best of years for
. First, it ran out of
wine. Then, its revenue growth was kneecapped, rising only 8% while that of cross-valley rival
leaped ahead 18%. And so its share price slumped, from over 50 in January to the low 20s by early October.
Little surprise, then, that Mondavi was accused of pulling a wag-the-dog when it made a highly visible change in the way it accounts for its inventory of grapes. After all, the last time companies made a large-scale shift from LIFO (last-in-first-out) to FIFO (first-in-first-out) was way back in the inflation-riddled '70s.
But contrary to the catty gossip, Mondavi's change actually makes a lot of common sense for a public winery. The big question is: Why did it take the company five years to do it?
"FIFO makes the best sense for a public winery," said Mike Fisher of
Motto Kryla & Fisher
, the wine industry's top accounting firm. "While LIFO is better for reducing income taxes, FIFO helps even out wild fluctuations in fixed costs from year to year, fluctuations caused by factors like grape crop yields that the winery has no control over."
Using FIFO means that a winery can match the cost of making a specific vintage against the sales from that same vintage. LIFO, on the other hand, forces the winery to book not the wine's original cost but its replacement cost. This reduces taxable income during a period of increasing unit costs. But minimizing income taxes this way means that earnings get hammered as well. You gotta pay the tax man or the investors -- you can't have it both ways.
In its earnings conference call last week, Mondavi CFO Stephen McCarthy said that FIFO also "allows us to better link management's incentive compensation to P&L results ... reduces costs of sales volatility."
The question is, is the accounting change worth the $17 million in additional taxes Mondavi will have to pay over the next four years? Well, considering that there are about 15.3 million shares out, a $1 increase in market cap would just about instantly amortize the whole thing. And Mondavi shares rose $4, or 16%, thanks in part to the news that FIFO helped boost its fiscal first-quarter profits over last year.
More importantly, a direct earnings comparison might go a long way toward equalizing the companies in the minds of investors. How much sense does it make for two companies that are just about the same size -- Mondavi did $341 million last year and Beringer did $334 million -- to be so far apart in investors minds? After all, Beringer is trading at more than 27 times earnings; Mondavi, at a hair over 17. This gives Beringer a market cap of almost $800 million, while Mondavi is valued at just $490 million.
Sure, they're wagging the dog a little. Investors ruthlessly compare Beringer and Mondavi with each other, and in the market's mind, Mondavi has not looked so hot for a while. Beringer already uses FIFO, and Mondavi's change will allow analysts and investors to make more direct earnings comparisons.
All of this makes me think somebody at Mondavi ought to have wagged this dog a long time ago.
Lewis Perdue is the editor and publisher of
Wine Investment News, a comprehensive site offering breaking news and analysis of the 22 publicly traded wine and liquor companies, and private wine partnerships. He can be reached at