Constellation Brands slashes its outlook, sending stocks tumbling
- Constellation Brands' Q3 net sales jumped 9% to $1.97 billion, driven by increases in its beer business, according to its most recent earnings report. But the company's net income for the quarter dropped to $303.1 million from $492.8 million the same time last year, largely because new investments weighed on the earnings.
- The company lowered its guidance on the year, causing shares to drop as much as 15% in trading Wednesday morning. Constellation expects to earn between $9.20 and $9.30 per share for fiscal 2019 on an adjusted basis, missing earnings expectations of $9.43 per share. The company anticipates net sales for wine and spirits to drop a few points in fiscal 2019. The lowered guidance also accounts for additional interest expenses from financing its investment in Canopy Growth.
- CEO Rob Sands focused on the company's success in the earnings release. "The results delivered by our beer business mark the highlight of our third quarter performance," Sands said. "Our leadership in the high-end U.S. beer industry positioned us to be the most significant growth contributor at retail during the quarter.”
Although Constellation lowered its guidance for the year, the company seems to be hoping changes in fiscal 2019 will help the in the long run. With big bets on cannabis-infused beverages and streamlining of its portfolio, a lot is on the line for the nation's third-largest beer company.
Beer continues to be a bright spot for Constellation. The Corona maker's net sales in the segment grew 16% to $1.21 billion from last year. This continues a trend of continued increases in the beer business. Last quarter, the company's investments in beer also helped boost earnings with net sales increasing 10%. But this quarter, even beer margins struggled. The company's operating margin for its beer business dropped 60 basis points to 37.3% — caused by transportation costs, operational costs and marketing investments. Additionally, the company said beer depletion was up 7.8% in the quarter. But Sands kept a rosy outlook on its beer business, saying the "Modelo and Corona brand families continue to be on fire."
The company's wine and spirits haven't been nearly as successful. Net sales in that sector increased only 0.4% to $762.8 million this quarter. The company said in the release that it continues to refine its options to boost its wine and spirits business and drive increased focus on its top brands — but net sales and operating income are still expected to drop.
These struggles with wine and spirits shouldn't come as a surprise. Alcohol companies have struggled to develop a strong audience for their drinks since millennials don't have strong loyalty to brands and seek out new items and innovations. That has caused traditional beverages to be in competition with craft spirits, cannabis-infused beverages and alcohol-free drinks.
Constellation has made efforts to adjust to these trends and shed its troubled brands. At the end of last year, sources said the company is planning to sell some of its U.S.-based wine brands in a deal that could be valued at more than $3 billion. This plan would get rid of some of the problematic items in the company's portfolio, and also showcases its shift toward cannabis and beer. Constellation made a $3.9 billion investment in Canadian cannabis company Canopy Growth in August to develop cannabis-infused beverages. The deal closed in November, giving the beverage company a total $5.4 billion investment.
Although this investment could help the company in the long term, it isn't boosting results yet. Constellation financed the Canopy Growth deal with debt, and the interest expenses are expected to hurt its per-share earnings in 2019. Constellation also said in the report that it wrote down the value of its Canopy stake by $164 million in the third quarter.
Bonnie Herzog, an analyst for Wells Fargo Securities, called the results disappointing.
"While we remain bullish on STZ’s positioning in beer and its l.t. opportunity especially with its investment in Canopy Growth (NYSE:CGC), we believe it is urgent that STZ address its low end wine business," Herzog said in an email.
With Sands stepping down in March for current President and Chief Operating Officer Bill Newlands to take over, the pressure is on to see positive results soon.
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