U.S. Markets open in 5 hrs 44 mins

Constellation Brands (STZ) Beats on Q2 Earnings, Updates View

Zacks Equity Research

Constellation Brands Inc. STZ has delivered stellar second-quarter fiscal 2020 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. With this, the company reported earnings beat in 18 of the last 19 quarters, with the seventh straight positive sales surprise.

Q2 Highlights

Constellation Brands reported second-quarter earnings of $2.72 per share, which outpaced the Zacks Consensus Estimate of $2.61. The reported figure includes Canopy Growth CGC equity loss of 20 cents. Excluding the Canopy effect, the company posted earnings of $2.91, which grew 1% from the year-ago quarter.

Net sales improved about 2% to $2,344 million and also outpaced the Zacks Consensus Estimate of $2,341 million.

Constellation Brands Inc Price, Consensus and EPS Surprise

At the company’s beer business, sales improved 7.4% to $1,640.4 million driven by a 5.3% rise in shipment volume and 6.2% depletions growth. Solid portfolio depletions and market share gains mainly stemmed from continued strength in the Modelo and Corona brand families. Notably, the company’s beer business was the most significant contributor to the U.S. beer market, courtesy of gains at Modelo Especial, Corona Premier and Corona Refresca.

However, sales at the wine and spirits segment declined 8.9% to $703.6 million in the fiscal second quarter. The downside can be attributed to a 10% fall in shipment volume and a 13.3% decline in depletions.

In the reported quarter, Constellation Brands has agreed to divest Black Velvet Canadian Whisky to Heaven Hill Brands in a deal worth $266 million.

Margins

Adjusted gross profit grew 2% year over year to $1,205.4 million. Also, the adjusted gross profit margin expanded 10 basis points (bps) to 51.4%.

Constellation Brands' comparable operating income edged up 1% to $792 million, while comparable operating margin contracted nearly 20 bps to 33.8%.

Further, the operating margin at the beer segment increased 50 bps to 41.8% owing to gains from higher pricing and currency, which were partly offset by higher cost of goods sold. However, the wine and spirits segment’s operating margin contracted 330 bps to 22.8% owing to higher cost of goods sold and marketing expenses.

Financial Position

Constellation Brands ended the fiscal second quarter with cash and cash equivalents of $81.3 million. As of Aug 31, 2019, it had $12,159.8 million in long-term debt (excluding current maturities) along with total shareholders’ equity of $11,691 million.

At quarter-end, Constellation Brands generated operating cash flow of $1,419.4 million and adjusted free cash flow of $1,064.2 million.

Moreover, the company bought back roughly 266,000 shares for $50 million in the fiscal second quarter. It also paid dividends of $285 million in the first half of fiscal 2020.

On Oct 2, 2019, the company announced a quarterly dividend of 75 cents per share for Class A and 68 cents for Class B stock. The dividend is payable Nov 22, 2019, to its shareholders of record as on Nov 8.

Fiscal 2020 Outlook

Management updated guidance for fiscal 2020. To account for the adjustments related to Canopy Growth deal-related losses and other activities, the company provided earnings per share projections on a GAAP basis and comparable (excluding Canopy) basis. Further, the revised view assumes that the wine and spirits transaction is likely to close by the end of third-quarter fiscal 2020, and the Black Velvet transaction to close at the beginning of the next month.

For fiscal 2020, the company now envisions comparable earnings per share (EPS) of $9.00-$9.20, up from a prior projection of $8.65-$8.95. In fiscal 2019, the company comparable EPS of $9.28 and $9.34 (excluding Canopy). On a reported basis, EPS for the fiscal year is anticipated to be 55-75 cents compared with $17.57 reported in fiscal 2019.

Constellation Brands continues to anticipate net sales and operating income for the beer segment to increase 7-9% in fiscal 2020. Net sales for the wine and spirits business are estimated to decline 15-20%, with operating income likely to fall nearly 25%.

Certain other factors were also taken into consideration in providing earnings guidance. These include an interest expense expectation of $430-$440 million. Further, the company expects tax rate of roughly 17% and weighted average diluted shares outstanding of approximately 195 million.

For fiscal 2020, Constellation Brands anticipates capital expenditure to be $800-$900 million, with roughly $600 million estimated to be incurred for the expansion of Mexico beer operations. The company’s free cash flow expectation for fiscal 2020 lies around $1.3-$1.4 billion.