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Can Constellation Brands Afford Margin Expansion in Fiscal 1Q17?

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Aug. 18 2020, Updated 5:26 a.m. ET

“Premiumization” strategy

Constellation Brands’ (STZ) “premiumization” strategy is helping it to enhance its margins. The company is focusing on expanding its presence in the high-end segment of its beer, wine, and spirits businesses. The company’s acquisitions of craft brewer Ballast Point and the Meiomi luxury wine brand are part of its premiumization strategy. The April 2016 acquisition of The Prisoner Wine Company’s portfolio of brands, which includes five fast-growing, higher-margin, super-luxury wine brands, also aligns with the company’s premiumization efforts.

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Margins in 4Q16

In fiscal 4Q16, which ended on February 29, 2016, Constellation Brands’ gross margin expanded by 100 basis points to 45.1%, driven by the company’s premiumization efforts. Constellation Brands’ operating margin increased to 26.6% in 4Q16 from 26.1% in 4Q15. The improvement in the 4Q16 operating margin was a result of strong sales of premium brands, but sales were partially offset by increased marketing investments and higher compensation expenses.

In fiscal 2016, Constellation Brands’ gross margin expanded to 44.9% from 42.8% in fiscal 2015, and its operating margin increased to 27% from 24.9% in fiscal 2015. Rival alcoholic beverage peers Anheuser-Busch InBev (BUD) and Molson Coors Brewing Company (TAP) reported operating margins of 31.9% and 14.6%, respectively, in 2015. Spirits and wine producer Brown-Forman (BF.B) reported an operating margin of 49.6% in the fiscal year ending April 30, 2016.

The iShares Russell Mid-Cap Growth ETF (IWP) has 8% exposure to the consumer staples sector and 0.8% exposure to Constellation Brands.

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Headwinds and tailwinds

In the 4Q16 conference call, David Klein, Constellation Brands’ chief financial officer, discussed the factors that are likely to impact the company’s operating margin in fiscal 2017.

The company expects the beer segment’s operating margin to be positively impacted in fiscal 2017 by product pricing, favorable foreign currency movement, favorable trends in commodities, glass sourcing, and lower levels of finished goods purchased under the interim supply agreement with Anheuser-Busch InBev.

The company’s production capacity expansion activities are expected to adversely impact the beer segment’s operating margin in fiscal 2017 as a result of higher depreciation expenses, line commissioning and optimization costs, and employee hiring. The company expects these costs, along with marketing investments and the consolidation of Ballast Point, to offset the impact of the aforementioned favorable factors.

In summary, Constellation Brands expects its beer operating margin to remain flat in fiscal 2017 compared to the previous fiscal year. The fiscal 2017 operating margin of the company’s wine and spirits business is expected to continue to benefit from the Meiomi wine acquisition.

We’ll discuss analysts’ expectations for Constellation Brands’ 1Q17 earnings in the next part of this series.

Correction: When this article was originally published, it mistakenly indicated the following: “Rival alcoholic beverage peers Anheuser-Busch InBev (BUD) and Molson Coors Brewing Company (TAP) reported operating margins of 31.9% and 14.6%, respectively, in 4Q15.” The results were actually for 2015. We have updated the post with this revision. We regret this error.

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