Improved gross margin
Constellation Brands’ (STZ) gross margin increased to 51.1% in fiscal 2Q18[1. Fiscal 2Q18 ended on August 31, 2017.] from 47.9% in fiscal 2Q17. Lower costs of products sold in the beer segment contributed about 230 basis points to gross margin expansion in fiscal 2Q18. Higher pricing in select beer markets contributed 55 basis points to gross margin expansion in fiscal 2Q18.
The beer segment’s lower cost of goods sold reflects the positive impact of supply independence from Anheuser-Busch InBev (BUD) and the benefits of glass sourcing. The company’s breweries and Mexico glass plant operated efficiently during the peak summer production period.
Operating margin expansion
Constellation Brands’ operating margin increased significantly to 34.2% in fiscal 2Q18 from 30.2% in fiscal 2Q17. The operating margin for the company’s beer segment expanded 420 basis points to 41.1% in fiscal 2Q18. The impressive expansion was due to lower cost of goods sold, higher pricing, and favorable foreign currency fluctuations.
The operating margin for the company’s wine and spirits segment improved 40 basis points to 26.2% in fiscal 2Q18. The improvement was a result of a favorable mix arising from the company’s portfolio premiumization efforts, partially offset by higher marketing investments. The divestiture of the company’s lower margin Canadian wine business also helped in the year-over-year improvement in the operating margin for fiscal 2Q18.
For the second half of fiscal 2018, Constellation Brands expects some moderation in the operating margin of its beer segment. That’s due to a lower production volume from the usual seasonality of the business. The continued rise in depreciation expenses and line commissioning costs, including increased head count additions to support the expanding operations, are also expected to adversely impact the segment’s margin.
In the next part, we’ll look at the changes in analysts’ price targets for Constellation Brands stock after the fiscal 2Q18 results.