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Constellation Brands Stock Rose on Fiscal 1Q18 Earnings

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Part 6
Constellation Brands Stock Rose on Fiscal 1Q18 Earnings PART 6 OF 6

What Affected Constellation Brands’ Margins in Fiscal 1Q18?

Fiscal 1Q18 margins

Constellation Brands’ (STZ) gross margin expanded to 51.4% in fiscal 1Q18 from 47.1% in fiscal 1Q17. This major improvement in the fiscal 1Q18 gross margin was mainly driven by the lower cost of product sold in the company’s Beer segment. Other favorable factors included higher beer pricing in select markets, a favorable impact from the acquired higher-margin wine and spirits brands, divestiture of the lower-margin Canadian wine business, and the positive impact of a tproduct mix shift in the company’s Wine and Spirits segment.

Unlike Constellation Brands’ gross margin, its operating margin fell in fiscal 1Q18.

What Affected Constellation Brands’ Margins in Fiscal 1Q18?

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Operating margin down

In fiscal 1Q18, Constellation Brands’ operating margin fell by ten basis points on a year-over-year basis to 29.4%. The strong operating margin growth in the Beer and the Wine and Spirits segments was offset by an impairment charge of $86.8 million associated with the Ballast Point craft beer portfolio. The company’s adjusted operating margin in fiscal 1Q18 increased to 34.6% from 29.3% in fiscal 1Q17.

The operating margin of the Beer segment expanded 470 basis points to 40.3% in fiscal 1Q18. The lower cost of goods sold, the favorable foreign currency changes, and higher pricing helped in improving the segment’s margins. The lower cost of goods sold was driven by supply independence from Anheuser-Busch InBev (BUD), the better-than-expected performance at Obregon brewery facility, and lower materials and freight costs.

The operating margin of the Wine and Spirits segment surged 640 basis points to 29.7% in fiscal 1Q18. The segment’s operating margin gained from favorable mix and pricing, lower promotion spending, the divestiture of the lower-margin Canadian wine business, and benefits from the acquisitions of higher-margin brands.

Overall, Constellation Brands’ focus on high-end beer, wine, and spirits brands is expected to benefit its margins in the long run.

For more information, please visit Market Realist’s Alcoholic Beverages page.

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