Dive Brief:
-
Constellations Brands reported third-quarter income of $491.1 million, up from $405.9 million a year ago, according to a company release. Revenue fell 0.6% to $1.8 billion. The company also said its board approved a $3-billion share buyback program.
-
Beer sales, which make up more than half of the company's total sales, increased by 8% during the quarter. Wine and spirit sales fell 10.3% due to a 2.5% drop in distribution shipment volumes. These results also reflect the sale of the company's Canadian wine business in December 2016. Constellation said it now expects its wine and spirit sales for fiscal 2018 to come in on the low end of the 4-6% decline it previously estimated.
-
“It’s been a dynamic time for our business," Rob Sands, president and CEO of Constellation Brands, said in a statement. "We are pleased with the outcome of tax reform legislation that allows U.S. companies to remain competitive globally and we believe it will be positive for Constellation going forward.”
Dive Insight:
While Constellation had been posting stellar results for nine straight quarters, this latest earnings report missed Wall Street estimates and pushed shares down nearly 2.4% on Friday. But beer sales continue to be a bright spot, and the company projects net sales growth for fiscal 2018 to be between 9% and 11%.
The company said that its beer business — particularly its Corona Extra and Modelo Especial brands — dominated the Labor Day and Thanksgiving holidays in the U.S. market this year, enjoying ongoing distribution and velocity gains. In addition, its beer segment drove 80% of total U.S. beer category growth, with the company claiming four of the "Top 10" share gainer positions, according to a release.
Constellation’s portfolio of Mexican beers, including Corona, Modelo Especial and Pacifico, continue to grow margins and market share as they benefit from a growing Hispanic population. At a recent industry conference, Constellation executives noted around 36 million Hispanics of legal drinking age currently reside in the U.S., and that number is expected to reach 46 million by 2025.
The company's obvious weak spot is its wine and spirits segment, where net sales are expected to fall by 4% to 6% for the rest of fiscal 2018. Some of this stems from divestiture of its former Canadian wine brands. On the plus side, the company reported that operating margins expanded 1.7% in its fiscal year so far.
Bonnie Herzog, an analyst with Wells Fargo Securities, noted that the company's momentum remains strong and that the continuing growth in operating profit was encouraging. Nevertheless, she indicated concerns about declining wine distribution volumes and soft beer volume and net pricing.
"We continue to think (Constellation's) momentum is strong and are encouraged by its continued (operating) profit growth and improved FY18 outlook," she said in a note to clients, adding that Constellation "remains our top beverage stock pick."
Constellation's investments in experimental new categories also could spur new growth. The company recently announced it had acquired a 9.9% stake in Canadian marijuana company Canopy Growth Corporation. The $191-million deal will allow the alcoholic beverage giant and Canopy to develop cannabis-infused beverages and "stay ahead of evolving consumer trends."
Constellation CEO Rob Sands told The Wall Street Journal that the investment will ensure a "first-mover advantage" in an industry the company expects to soon be legalized nationwide in Canada. If that investment works out as planned, it could have a significant impact on the company's financial position going forward.