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Why Constellation Brands’ Margins Contracted in the Second Quarter

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Margin down in Q2

Constellation Brands’ (STZ) margins contracted in the second quarter of fiscal 2019 despite strong operational results from its beer segment. The company’s gross margin declined to 50.8% in the second quarter of fiscal 2019 compared to 51.2% in the second quarter of fiscal 2018. The higher gross margin of the beer segment was offset by a decline in the gross margin of the wine and spirits segment.

The beer segment’s gross margin grew 90 basis points to 55.2% due to higher pricing in select markets, favorable foreign currency changes, and lower operational costs resulting from brewery sourcing benefits. The gross margin of the wine and spirits segment declined 110 basis points to 43.6% owing to higher raw material costs. Higher transportation costs adversely impacted the gross margins of the beer and wine and spirits segments.

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Operating margin in Q2

Constellation Brands’ operating margin declined about 110 basis points to 33.3% in the second quarter. The company’s operating margin contraction was a result of higher marketing spending and investments in growth initiatives.

Despite higher marketing investments, the operating margin of the company’s beer segment increased ten basis points to 41.3% due to higher pricing and a strong operational performance in the quarter. The segment’s marketing investments were directed towards the Corona Premier and Corona Familiar introductions and sustaining the momentum in the company’s existing Mexican beer portfolio. The operating margin of the wine and spirits segment fell 20 basis points to 26.1% due to higher marketing expenses.

Margin outlook

Despite higher transportation costs and marketing expenses, Constellation Brands expects its full-year fiscal 2019 beer segment operating margin to be in line with the fiscal 2018 gross margin of 39.5%.

The company aims to bring down the impact of higher costs on the wine and spirits’ operating margin by focusing on the growth of premium, high-margin brands and productivity measures.

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