What Drove Constellation Brands’ Fiscal 1Q17 Margin Growth?



Gross margin expansion

Constellation Brands (STZ) delivered yet another quarter of improved margins. In fiscal 1Q17, which ended on May 31, 2016, Constellation Brands’ gross margin increased significantly to 47.1% from 45.2% in fiscal 1Q16. The company attributed this increase to the favorable impact from beer pricing in select markets, foreign currency transactional benefits within the company’s Mexican beer portfolio, the acquisition of premium wine brands from Meiomi and The Prisoner Wine Company, and volume growth within the company’s Mexican beer portfolio.

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Operating margin rose in fiscal 1Q17

In fiscal 1Q17, Constellation Brands’ operating margin expanded to 29.5% from 26.2% in fiscal 1Q16. The increase in operating margin was driven by a decrease in SG&A (selling, general, and administrative) expenses as a percentage of sales. In 1Q17, net sales growth surpassed the growth in SG&A expenses of the beer segment as well as the wine and spirits segment.

The operating margin of the company’s beer segment increased 80 basis points to 35.6% in fiscal 1Q17. This margin expansion was driven by higher pricing, favorable foreign currency benefits, and timing of marketing spending for the company’s Mexican beer portfolio.

The wine and spirits segment’s operating margin improved 160 basis points to 23.3% in 1Q17 on a year-over-year basis. The segment’s operating margin benefited from the Meiomi luxury wine brand acquisition.

The iShares Russell 1000 ETF (IWB) has 0.1% exposure to Constellation Brands.

Peers’ margins

In 1Q16, the operating margins of Anheuser-Busch InBev (BUD) and Molson Coors Brewing Company (TAP) were 28.3% and 37%, respectively. Brown-Forman’s (BF.B) operating margin for fiscal 4Q16, which ended on April 30, 2016, was significantly high at 99.6%, due to the one-time impact of the $485 million gain related to the sale of Southern Comfort and Tuaca brands to Sazerac Company.

We’ll discuss the stock price movements of Constellation Brands and its peers in the next part of this series.


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