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Constellation Brands (STZ) Tops Q2 Earnings & Sales Estimates

Constellation Brands, Inc. STZ has reported impressive second-quarter fiscal 2023 results, wherein the top and bottom lines beat the Zacks Consensus Estimate and improved year over year.

Results have benefited from strong consumer demand for its portfolio of premium, high-end products. Double-digit net sales and operating income growth in the beer business aided the top and bottom lines.

This Zacks Rank #2 (Buy) company has posted fiscal second-quarter comparable earnings of $3.17 per share, which advanced 33.2% year over year and beat the Zacks Consensus Estimate of $2.88. On a reported basis, the company reported a loss of $6.30 against earnings of a penny in the year ago quarter. Excluding the impacts of Canopy Growth, it has posted comparable earnings of $3.33 per share, up 32.1% from the year-ago period.

Net sales rose 12% to $2,655.1 million and surpassed the Zacks Consensus Estimate of $2,515 million. Sales benefited from robust growth in the beer business, and improved sales in the wine and spirits business.

The company’s beer business has reported sales growth of 15% to $2,139.3 million, including a 12.1% increase in shipment volumes and 9% depletion growth. Sales growth for the segment was driven by robust consumer demand for its iconic brands. Depletion volume benefited from the continued robust performance of Modelo Especial and resilient growth in Corona Extra.

Depletion volume increased more than 10% for Modelo Especial and above 6% for Corona Extra. Modelo Especial continued to be the No. 1 beer brand in the high-end category, strengthening its leadership position. It was also the largest share gainer in dollar sales in the U.S. beer category in IRI channels. Meanwhile, Corona Extra was the third-leading import share gainer and ranked the third brand in the high-end IRI channels.

Sales in the wine and spirits segment rose 1% to $515.8 million in the fiscal second quarter. The sales improvement was driven by shipment and depletion growth for the segment. Shipment volume in the wine and spirits business remained flat year over year, whereas depletions declined 2.2%. Depletion growth for the segment can be attributed to double-digit gains for Meiomi, The Prisoner Wine Company, High West Whiskey, Robert Mondavi Private Selection, Mi CAMPO Tequila and Casa Noble Tequila.

Shares of STZ have dropped 2.3% in the past three months against the industry’s decline of 4.7%.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

 

Margins

The adjusted gross profit grew 13% year over year to $1,372 million. The adjusted gross profit margin expanded 50 basis points (bps) to 51.7%.

Constellation Brands' comparable operating income rose 21% to $883 million, whereas the comparable operating margin expanded 250 bps to 33.3%.

The operating margin in the beer segment expanded 330 bps to 40.5%, driven by positive pricing, reduced obsolescene charges, robust volume growth and a decline in marketing expenses.

The wine and spirits segment’s operating margin contracted 40 bps to 19.3%, owing to gains from higher spirit sales, lower marketing expenses and positive pricing, more than offset by rising SG&A expenses and COGS expenses stemming from elevated raw material and transportation costs.

Financial Position

As of Aug 31, 2022, Constellation Brands’ cash and cash equivalents were $165.1 million, with long-term debt (excluding current maturities) of $10,278.7 million and total shareholders’ equity (excluding non-controlling interest) of $9,710.9 million. The company generated an operating cash flow of $1,654 million and an adjusted free cash flow of $1,219.3 million as of Aug 31, 2022.

On Oct 5, 2022, the company announced a quarterly dividend of 80 cents per share for Class A stock and 72 cents for Class B stock. The dividend is payable on Nov 18 to its shareholders of record as of Nov 4.

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

Outlook

Following the second-quarter fiscal 2023 results, Constellation Brands updated its fiscal 2023 view. The company expects comparable earnings of $11.20-$11.60 (excluding canopy growth impacts) compared with the $11.20-$11.50 stated earlier. The company expects earnings between 75 cents and $1.15 on a reported basis compared with the $10.50-$10.80 mentioned earlier. These suggest improvements from comparable earnings (excluding canopy growth impacts) of $10.99 and reported earnings of $10.20 in the prior year.

Net sales are likely to increase 8-10% for the beer segment, up from the prior stated 7-9%. Operating income is anticipated to increase 3-5%, up from the earlier mentioned 2-4%. The company expects net sales for the wine and spirits business to be flat to down 2%, reflecting an improvement from the prior mentioned decline of 1-3%. The operating income for the segment is envisioned to grow 3-5%, down from the previously communicated 4-6%.

The company predicts interest expenses of $360-$370 million, up from the earlier stated $350-$360 million for fiscal 2023. Constellation Brands forecasts an operating cash flow of $2.6-$2.8 billion for fiscal 2023, whereas the free cash flow is estimated to be $1.3-$1.4 billion. The company plans to incur a capital expenditure of $1.3-$1.4 billion in fiscal 2023, including $1.2 million targeted for the Mexican beer operations’ expansion activities.

The company outlined plans for incremental capacity expansion in Mexico to support growth in its high-end Mexican beer portfolio. It anticipates a total capital expenditure of $5-$5.5 billion for the beer business between fiscal 2023 and 2026. The latest expansion will support an additional of up to 30 million hectoliters of modular capacity and includes the construction of a brewery in Southeast Mexico’s Veracruz. It also targets continued expansion and the optimization of the existing Nava and Obregon breweries.

In a recent development, STZ announced that it will divest part of its mainstream and premium wine portfolio, including Cooper & Thief, Crafters Union, The Dreaming Tree, Monkey Bay, 7 Moons, and Charles Smith Wines, to The Wine Group. The deal is likely to conclude by Oct 6. In 2021, Constellation Brands sold the majority of its popular and mainstream wine and spirits portfolio. The move is in sync with its efforts to focus primarily on premium and fine wine and craft spirits segments.

Stocks to Consider

We highlighted some other top-ranked stocks from the broader Consumer Staples space, namely General Mills GIS, PepsiCo PEP and FEMSA FMX.

General Mills, which manufactures and markets branded consumer foods worldwide, currently carries a Zacks Rank of 2. GIS has a trailing four-quarter earnings surprise of 6.5%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for General Mills’ current financial year’s sales and EPS suggests growth of 2% and 1.5%, respectively, from the year-ago reported figures.

PepsiCo is one of the leading global food and beverage companies. It currently has a Zacks Rank #2. The company has an expected EPS growth rate of 7.7% for three to five years. Shares of PEP have declined 3.6% year to date.

The Zacks Consensus Estimate for PepsiCo’s current financial-year sales and earnings suggests growth of 5.6% and 6.4%, respectively, from the year-ago period’s reported figures. PEP has a trailing four-quarter earnings surprise of 3.8%, on average.

Fomento Economico Mexicano, alias FEMSA, has exposure to various industries, including beverage, beer and retail, which gives it an edge over its competitors. It currently has a Zacks Rank #2. FMX has a trailing four-quarter earnings surprise of 18.9%, on average. Shares of FMX have lost 14.9% year to date.

The Zacks Consensus Estimate for FEMSA’s current financial-year sales suggests growth of 11.3% from the year-ago period's reported figures. FMX has an expected EPS growth rate of 11.4% for three-five years.


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