Strength in Beer Unit Aids Constellation Brand (STZ) Amid Cost Woes
Constellation Brands STZ has been gaining from strength in its beer business. Also, the company’s premiumization strategy bodes well. Driven by these factors, STZ delivered impressive first-quarter fiscal 2024 results, wherein the bottom and top lines beat the Zacks Consensus Estimate and improved year over year.
STZ’s comparable earnings of $2.91 per share for the fiscal first quarter grew 9% year over year. Excluding the impacts of Canopy Growth, it posted comparable earnings of $3.04 per share, up 5% from the year-ago period. Net sales rose 6% year over year to $2,515 million.
Consequently, shares of this Zacks Rank #3 (Hold) company have gained 20.3% in the past three months against the industry’s decline of 2.1%.
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Let’s Delve Deeper
Constellation Brands has been significantly gaining from strength in the beer business over the years. In first-quarter fiscal 2024, the company’s sales advanced 11% year over year to $2,098.6 million in the beer business and beat our estimate of $2,006.5 million. The upside was driven by a 7.5% increase in shipment volumes and 5.5% depletion growth.
Depletion volume benefited from the continued robust performances of Modelo Especial, the Modelo Chelada brands, Corona Extra, Pacifico and Modelo Oro. The depletion volume increased 5% for Modelo Especial and about 40% for Modelo Chelada. 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, Modelo Chelada was the No. 1 brand in the U.S. beer market and held more than 65% share of the entire chelada category. Additionally, depletion for Corona Extra improved 1%. The brand retained its position as the third share gainer in the U.S. beer category in IRI channels. For fiscal 2024, sales are likely to increase 7-9% for the beer segment, in line with our estimate of 8.5% growth.
The company’s plans to invest in the next phase of capacity expansion in Mexico also bode well. This will help meet the potential demand for the high-end Mexican beer portfolio, including the emerging Alternative Beverage Alcohol sub-space, which includes hard seltzers. The latest expansion will support an addition 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.
Also, it is progressing well with its premiumization strategy, driven by accelerated growth for Power Brands in first-quarter fiscal 2024. The Wine and Spirits Business has been shifting its portfolio to higher-end brands that are better aligned with consumer-led premiumization trends. The company's high-end Power Brands, including The Prisoner Brand Family, Kim Crawford and Meiomi, were the key growth drivers.
The beer segment witnessed gains from premiumization, driven by growth in traditional beer, as well as the flavors category, including seltzers, flavored beer, RTD spirits, and flavored malt beverages. The company is making investments to fuel growth of its power brands through innovation, capitalizing on priority and consumer trends, with successful product introductions.
For fiscal 2024, management expects comparable earnings of $11.70-$12 per share (excluding canopy growth impacts), which compares favorably with last year’s reported comparable earnings of $11.40 (excluding canopy growth impacts). It anticipates earnings of $9.35-$9.65 per share on a reported basis, suggesting an improvement from a loss of 11 cents reported in fiscal 2023.
Hurdles on the Way
Despite such upsides, the company is reeling under higher packaging and raw material costs from continued inflationary pressures. Higher overhead costs related to its brewery expansion and increased logistics costs related to higher shipment volumes act as deterrents.
Owing to this, the comparable operating loss was $62.5 million against the prior-year quarter’s operating income of $23.9 million. Going into fiscal 2024, the company reels under higher packaging and raw materials, freight and overhead costs.
Conclusion
Although freight headwinds and sluggishness in the wine & spirits business are concerning, we hope that strength in its beer business, solid demand and premiumization strategy will likely aid the stock in the future.
The Zacks Consensus Estimate for STZ’s fiscal 2023 sales and earnings per share suggests year-over-year growth of 7.1% and 5.4%, respectively. Topping it, a long-term earnings growth rate of 11.5% and a VGM Score of B drive optimism.
Stocks to Consider
We highlighted some better-ranked stocks from the broader Consumer Staples space, namely TreeHouse Foods THS, Associated British Foods ASBFY and Celsius Holdings CELH.
TreeHouse Foods, a manufacturer of packaged foods and beverages, currently sports a Zacks Rank #1 (Strong Buy). THS has a trailing four-quarter earnings surprise of 49.3%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for TreeHouse Foods’ current financial year’s sales suggests a decline of 12.4% from the year-ago reported numbers.
Associated British Foods is a diversified international food, ingredients and retail group, which currently flaunts a Zacks Rank #1. ASBFY’s expected EPS growth rate for three to five years is 7%.
The Zacks Consensus Estimate for Associated British Foods’ current financial-year sales and earnings suggests growth of 30.4% and 4.2%, respectively, from the year-ago reported figures.
Celsius Holdings currently carries a Zacks Rank #2 (Buy). CELH specializes in commercializing healthier, nutritional functional foods, beverages and dietary supplements.
The Zacks Consensus Estimate for CELH’s current financial-year sales indicate 67.9% growth from the year-ago reported figure, and the same for EPS implies a 154% rise. The company had an earnings surprise of 81.8% in the last reported quarter.
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Constellation Brands Inc (STZ) : Free Stock Analysis Report
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