Constellation Brands reported better-than-expected earnings on Wednesday, driven by strength in its beer business. However, shares fell 4% after an initial upside move, as investors — including us — remain concerned about continued weakness in its wine and spirits business. Comparable net sales for the three months ended May 31 rose 6% year over year to $2.662 billion, missing Wall Street’s forecast of $2.671 billion, according to LSEG. Adjusted earnings per share (EPS) rose 17% from the year-ago period, to $3.57, above the $3.46 per share analysts had forecast. Constellation Brands Why we own it: We like Constellation Brands for its beer franchise, which includes popular Mexican brands Modelo, Corona and Pacifico. We’d like Constellation to focus on beer and divest its wine and spirits business. Competitors: Anheuser-Busch Inbev and Molson Coors Weight in Club Portfolio: 2.5% Last Purchase: April 16, 2024 Started: May 5, 2022 The bottom line This quarter confirmed our belief that Constellation has a great beer business that weighs heavily on its wine and spirits unit. While overall sales were lower than expected, CEO Bill Newlands said they still outperformed overall CPG growth by 4.5 percentage points. This outperformance was largely driven by growth in the beer business, which had the second-largest share gain in the entire beverage industry and the largest share gain in spirits. We were again pleased to see that the increase in beer sales was driven by strong volume growth. Remember, the ability to grow sales through volume is critical given the inflationary dynamics we have had to deal with post-COVID. This is because consumers are beginning to resist higher prices. The ability to grow sales through volume takes some of the pressure off management to take action on pricing, a key factor that will help the company continue to gain market share. Operating cash flow was light, but free cash flow was broadly in line with expectations. As members know, cash flow is key to shareholder returns, and indeed, management paid out $185 million in dividends during the quarter, while repurchasing $200 million of shares and repurchasing another $40 million in June. The team continues to target a net leverage ratio of 3x by the end of the fiscal year. Management said it is working to correct the wine and spirits business and expects to see improvements in the second half of the year with “operational and commercial execution initiatives” that were identified in the fourth quarter of last fiscal year and began in the first quarter of this year. The guidance is in line with expectations that the weakness in the business has bottomed out. We continue to see a recovery or sell-off in the wine and spirits business as key to the stock reaching new highs. While we are sticking with the name given the strength of the beer, we have chosen to reduce our position and downgrade the stock to a 2 rating. We want to see some real progress before we become more positive on the stock’s trajectory from here. We maintain our price target at $300. Quarterly Results Constellation’s wine and spirits division remains a drag, with net sales down 7% to $389 million, slightly below Street estimates, while operating income fell 25% to about $60 million. The segment’s operating margin fell 370 basis points to 15.3%, worse than expected. The weakness was due to lower volumes and higher cost of goods sold, which more than offset the benefits of lower operating expenses elsewhere. Shipped volumes fell 5.1% due to “challenging” market conditions, particularly in the U.S. wholesale channel. Depletions, a key metric representing the amount of product a distributor has sold to retailers, were down 12.7% from a year ago. “Tactical investments in the 11 brands that account for 75% of net sales and over 80% of our FY24 wine and spirits volumes are underway, and we expect to see improvements in this select group of our most expansive offerings throughout the rest of the year,” the company said during a post-earnings call with investors. Beer results, on the other hand, remain largely positive. Although sales came in slightly below estimates, the result still equates to 8% year-over-year growth. Furthermore, strong profitability led to an outperform in operating income despite a weak top line. Operating margin expansion was driven by increased operating leverage (fixed costs were more prevalent), along with benefits from ongoing cost-cutting initiatives, and timeliness and efficiency in marketing investments. Shipments increased 7.6% year-over-year. Draft volumes increased 6.4% year-over-year, led by growth in Modelo Special (11%), Pacifico (21%) and Modelo Chelada (+5%). Based on data from the Sirkana channel, the company said its beer business was the largest dollar share gainer for the 11th consecutive quarter and the largest volume share gainer in the overall beer category in the U.S. Additionally, Constellations’ beer portfolio includes four of the top 15 brands that gained dollar share in the quarter. Management confirmed the guidance it provided in the prior quarter. Net sales are expected to increase 6% to 7%, driven by 7% to 9% growth in beer. Wine and spirits sales are expected to decline 0.5% to 0.5%. The foundation’s operating income is expected to grow 10% to 12% on a comparable basis, with beer up 10% to 12% and wine and spirits down 9% to 11%. Management expects comparable earnings to be $13.50 to $13.80 per share. Operating cash flow is expected to be between $2.8 billion and $3.0 billion, with free cash flow of $1.4 billion to $1.5 billion, after accounting for $1.4 billion to $1.5 billion in capital expenditures, with $1.2 billion of that targeted to support capacity additions for its Mexican beer operations. (See here for a full list of shares in Jim Cramer’s Charitable Trust.) 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 in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. The above Investment Club information is subject to our Terms and Conditions and Privacy Policy, as well as our Disclaimer. No fiduciary obligation or duty is, and is not, created by your receipt of any information provided in connection with the Investment Club. 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Bottles of Corona, Modelo and Pacifico beers are displayed on a shelf at a supermarket on April 6, 2017 in San Rafael, California.
Justin Sullivan | Getty Images
Brand Constellation Apple Inc. reported better-than-expected earnings on Wednesday, thanks to the strength of its beer business. However, shares fell 4% after their initial rally as investors — including us — remain concerned about continued weakness in its wine and spirits business.
