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Constellation Brands (STZ) Q2 Earnings Lag Estimates, Sales Beat

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Constellation Brands Inc. STZ reported lower-than-expected earnings in second-quarter fiscal 2022 results, while the top line beat the Zacks Consensus Estimate. Sales also improved year over year driven by continued growth in the beer business and robust consumer demand. Constellation Brands raised its comparable earnings per share view for fiscal 2022.

Constellation Brands posted fiscal second-quarter comparable earnings of $2.38 per share, which declined 14% year over year and missed the Zacks Consensus Estimate of $2.78. On a reported basis, the company’s earnings per share was 1 cent, which included Canopy Growth equity losses of 13 cents. Excluding the impact of Canopy Growth, it posted comparable earnings of $2.52 per share, down 13% from the year-ago period.

Net sales improved 5% to $2,371.1 million and beat the Zacks Consensus Estimate of $2,316.4 million. Organic net sales advanced 14% year over year. Sales benefited from double-digit net sales growth at the beer business, and organic sales growth in the wine and spirits business.

Constellation Brands Inc Price, Consensus and EPS Surprise

Constellation Brands Inc Price, Consensus and EPS Surprise
Constellation Brands Inc Price, Consensus and EPS Surprise

Constellation Brands Inc price-consensus-eps-surprise-chart | Constellation Brands Inc Quote

At the company’s beer business, sales climbed 14% to $1,861.3 million, including an 11.7% increase in shipment volumes and 7.3% depletion volume growth. Sales growth at the segment was driven by robust consumer demand for its iconic brands. Depletion volume benefited from continued strength in Modelo Especial and Corona Extra.

Depletion volume increased 16% for the Modelo Especial and nearly 5% for Corona Extra. The Modelo Especial became the No. 1 beer brand, thus strengthening its leadership position in the high-end category. It was also the largest share gainer in dollar sales in the U.S. beer category in IRI channels. Meanwhile, Corona Extra was the No. 2 share gainer and No. 3 in the high-end in IRI channels.

Sales in the wine and spirits segment decreased 18% to $509.8 million in the fiscal second quarter. Organic net sales for the segment advanced 15%. Organic net sales were driven by gains from consumer-driven innovation initiatives. Solid performances by The Prisoner Brand Family, Kim Crawford, and Meiomi were key growth drivers.

Shipment volume in the wine and spirits business slumped 36.2%, while depletions fell 2.3%. Organic shipment volume was up 5.7%. In the United States, the shipment volume plunged 41.1%, while organic shipment was flat with last year.

In the past three months, shares of this Zacks Rank #3 (Hold) company declined 6.1% compared with the industry’s fall of 11.4%.

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Margins

Adjusted gross profit rose 2% year over year to $1,214.5 million. Meanwhile, adjusted gross profit margin contracted 130 basis points (bps) to 51.2%.

Constellation Brands' comparable operating income declined 8% to $730.3 million, while comparable operating margin contracted 450 bps to 30.8%.

The operating margin in the beer segment contracted 530 bps to 37.2% due to higher cost of goods sold (COGS), marketing investments and SG&A expense, which more than offset gains from favorable pricing, mix and positive currency translations. This was somewhat negated by a rise in marketing spend and a higher cost of goods sold. Increased COGS primarily stemmed from obsolescence of $66 million associated with excess inventory of hard seltzers, due to a slowdown in the overall category in the United States.

The wine and spirits segment’s operating margin contracted 620 bps to 19.7% on the bulk sales of smoke-tainted wine, which was margin-dilutive, and higher SG&A and marketing expenses and increased COGS. This was partly offset by gains from improved mix stemming from the existing portfolio and divestitures.

Financial Position

Constellation Brands ended the fiscal second quarter with cash and cash equivalent of $103.4 million. As of Aug 31, 2021, it had $10,081.7 million in long-term debt (excluding current maturities) along with total shareholders’ equity (excluding non-controlling interest) of $11,192.7 million.

On Aug 31, 2021, the company generated an operating cash flow of $1,525.9 million and adjusted free cash flow of $1,172.5 million. It has repurchased 6.2 million shares for $1.4 billion through September of fiscal 2022.

On Oct 5, 2021, the company announced a quarterly dividend of 76 cents per share for Class A stock and 69 cents for Class B stock. The dividend is payable on Nov 19 to its shareholders of record as of Nov 5.

Outlook

Backed by its strong core beer business results and ongoing share repurchase activity, Constellation Brands updated its earnings guidance for fiscal 2022. The company now expects net sales growth of 9-11% for the beer segment compared with 7-9% growth mentioned earlier. Operating income for the beer business is anticipated to increase 4-6%, compared with 3-5% growth predicted previously. The raised beer business guidance is backed by solid performance of its core beer portfolio.

The company continues to predict net sales and operating income for the wine and spirits business to decline 22-24% and 23-25%, respectively. Organic sales for the wine and spirits segment are likely to grow 2-4%.

The company now expects interest expenses of $355-$365 million for fiscal 2022 compared with $360-$370 million expected earlier. It anticipates a reported tax rate of 83% and comparable tax rate of 20%, excluding Canopy equity earnings impact. Weighted average diluted shares outstanding is expected to be 192 million. The company expects share repurchases worth $1.4 billion in fiscal 2022.

Including the share repurchases through September only, Constellation Brands now estimates reported earnings per share of 30-60 cents, down from $2.70-$3.00 stated earlier. On a comparable basis, excluding the Canopy business, earnings per share are expected to be $10.15-$10.45, up from $10-$10.30 mentioned earlier. The company reported earnings per share of $10.23 on a reported basis and $10.44 on a comparable basis, excluding Canopy Growth in fiscal 2021.

Constellation Brands expects to generate an operating cash flow of $2.4-$2.6 billion for fiscal 2022, while free cash flow is estimated to be $1.4-$1.5 billion. The company plans to incur capital expenditure of $1-$1.1 billion in fiscal 2022, excluding $900 targeted for the Mexican beer operations’ expansion activities.

Better-Ranked Stocks to Consider

Albertsons Companies, Inc. ACI has a long-term earnings growth rate of 12%. It currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Coca-Cola FEMSA S.A.B. de C.V. KOF, with a Zacks Rank #2 at present, has a long-term earnings growth rate of 14.3%.

Coca-Cola Europacific Partners CCEP, a Zacks Rank #2 stock, has a long-term earnings growth rate of 21.1%.


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