Constellation Brands on Wednesday reported a better-than-expected profit margin, driven by strong beer business. But after an initial rise, shares fell 4% as investors — including us — remain concerned about ongoing weakness within the wine and spirits business. According to LSEG, comparable net sales for the three months ended May 31 rose 6% 12 months over 12 months to $2.662 billion, below Wall Street expectations of $2.671 billion. Adjusted earnings per share (EPS) rose 17% from the year-ago period to $3.57, beating the $3.46 per share forecast by analysts. Constellation Brands Why We Own It: We like Constellation Brands for its beer franchise, which incorporates popular Mexican brands Modelo, Corona and Pacifico. We want Constellation to give attention to beer and divest its wine and spirits business. Competitors: Anheuser-Busch Inbev and Molson Coors Club Portfolio Weight: 2.5% Last Purchase: April 16, 2024 Start: May 5, 2022 Bottom Line: This quarter reinforced our belief that Constellation has an amazing beer business, weighed down by its wine and spirits unit. While total sales fell in need of expectations, CEO Bill Newlands said the corporate still outperformed overall consumer packaged goods growth by 4.5 percentage points. This outperformance was largely as a result of growth within the beer business, which delivered the second-largest market share gain in your complete beverage industry and the biggest market share gain in alcoholic beverages. We were again pleased to see that the rise in beer sales was driven by strong growth in shipment volume. Remember, the power to extend revenue through increased volumes is critical given the inflationary dynamics we have been battling post-Covid. That’s because consumers are starting to beat back against high prices. The ability to extend revenue through increased volumes alleviates pressure on management to take pricing actions, a key factor that ought to help the corporate proceed to achieve market share. Operating money flow was light, but free money flow was broadly according to expectations. As members know, money flow is essential to shareholder return, and indeed, management paid $185 million in dividends in the course of the quarter, repurchased $200 million of stock, and repurchased one other $40 million of stock in June. The team continues to focus on a net leverage ratio of three by fiscal 12 months end. Management said it’s working to show across the wine and spirits business and expects improvements within the second half of the 12 months as “operational and commercial execution initiatives” identified within the fourth quarter of last fiscal 12 months and launched in the primary quarter of this 12 months take hold. The guidance is consistent with expectations that weakness within the business is bottoming out. We maintain our view that a recovery or sale of the wine and spirits segment is essential to the stock reaching latest highs. While we remain committed to the name given the strength of the beer segment, we have now decided to scale back our position and downgrade the stock to a 2 rating. We need to see actual progress before becoming more positive on the stock’s trajectory from here. We maintain our $300 price goal. Quarterly Results Constellation’s wine and spirits division stays a drag, as net sales fell 7% to $389 million, barely below Wall Street estimates, while operating income fell 25% to about $60 million. The segment’s operating margin fell 370 basis points to fifteen.3%, worse than expected. The weakness was as a result of lower volumes and better cost of products sold, which greater than offset the advantages of lower operating costs elsewhere. Shipments fell 5.1% as a result of “difficult” market conditions, primarily within the U.S. wholesale channel. Attrition, a key metric that measures how much product was sold by a distributor to retailers, fell 12.7% 12 months over 12 months. “Tactical investments in the 11 brands that represent 75% of net sales and over 80% of volume in our wine and spirits business in fiscal 2024 are now underway, and we expect improvements in this select group of our most comprehensive offerings as the year progresses,” the corporate said during its post-earnings conference call with investors. Beer segment results, alternatively, remain largely positive. Although sales were barely lower than estimates, earnings still amounted to eight% year-over-year growth. In addition, despite the revenue miss, strong profitability led to an outperformed operating income. The operating margin improvement resulted from greater operating leverage (fixed costs were more dispersed), together with advantages from ongoing cost-saving initiatives and timing and efficiency in marketing investments. Shipments increased 7.6% year-over-year. Discontinuations increased 6.4% from the year-ago period, led by gains in Modelo Especial (11%), Pacifico (21%) and Modelo Chelada (over 5%). Citing channel data from Circana, the corporate said its beer business posted the biggest revenue share gainer and the biggest volume share gainer in the general beer category within the U.S. for the eleventh consecutive quarter. In addition, Constellation’s beer portfolio includes 4 of the 15 brands with the best market share gains within the quarter. Forecast Management reiterated the previous quarter’s forecast. Net sales are expected to extend 6% to 7%, driven by 7% to 9% growth in beer. Wine and spirits sales are expected to extend 0.5% – to 0.5%. Operating income is predicted to extend 10% to 12% on a comparable basis, with beer down 10% to 12% and wine and spirits down 9% to 11%. Management expects comparable earnings of $13.50 to $13.80 per share. Operating money flow is estimated at $2.8 billion to $3.0 billion, and free money flow is estimated at $1.4 billion to $1.5 billion, after deducting $1.4 billion to $1.5 billion for capital expenditures, of which $1.2 billion is earmarked for Mexican beer production capability expansions. (A full list of stocks in Jim Cramer’s Charitable Trust may be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock from his charitable trust’s portfolio. If Jim has discussed a stock on television, he’ll wait 72 hours after the trade alert is issued before executing the trade. 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Bottles of Corona, Modelo and Pacifico beer sit on a supermarket shelf in San Rafael, California on April 6, 2017.
Justin Sullivan |
Constellation marks On Wednesday, the corporate reported an increase in profits, driven by strength in its beer business, but after an initial rise, shares fell 4% as investors – including us – remain concerned about ongoing weakness within the wine and spirits business.
