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Why Constellation Brands’ Q3 Margins Are Expected to Improve

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Improved margins

Constellation Brands (STZ) reported improved margins in the first two-quarters of fiscal 2017. The company’s productivity initiatives and focus on high-end, premium beer, wine, and spirits products is enhancing its margins. We discussed the company’s premiumization strategy in the previous parts of this series.

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Margins in the previous quarter

Constellation Brands’ gross margin rose to 47.9% in fiscal 2Q17 from 44.7% in fiscal 2Q16. Fiscal 2Q17 ended on August 31, 2016. The improvement in the fiscal 2Q17 gross margin was due to lower cost of products sold in the Beer and Wine and Spirits segments. The gross margin also benefitted from higher beer pricing in select markets.

The company’s operating margin rose to 30.2% in fiscal 2Q17 from 27.7% fiscal 2Q16. This increase came in as a higher gross margin offset the impact of a rise in selling, general, and administrative expenses.

Margin expectations

Following the fiscal 2Q17 results, Constellation Brands raised the Beer segment’s operating margin guidance to the 35% to 36% range for fiscal 2017 compared to the previous estimate of ~35%. The operating margin of the company’s Wine and Spirits segment is also likely to improve in fiscal 2017 due to the impact of the Meiomi and Prisoner premium wine brands.

Rival Anheuser-Busch InBev (BUD) reported an operating margin of 27.7% in 3Q16, down from 32.5% in 3Q15. The decline in the operating margin was a result of higher sales and marketing expenses and lower sales. The operating margin of Molson Coors Brewing (TAP) rose to 30.5% in 3Q16 from 0.8% in 3Q15. This increase was a result of a favorable comparison with 3Q15, which was adversely impacted by impairment charges related to the company’s Europe segment.

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

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