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What Drove Constellation Brands’ Q3 Operating Margin Expansion?

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Fiscal 2019 third-quarter margins

Constellation Brands’ (STZ) gross margin contracted in the third quarter of fiscal 2019, while its operating margin expanded. The company’s gross margin contracted to 49.2% in the quarter compared to 50.5% in the third quarter of fiscal 2018.

The beer business’s gross margin contracted 80 basis points to 53.8% as the impact of higher pricing in select beer markets was offset by the higher cost of products associated with its Mexican beer portfolio and costs arising from a temporary raw materials supply issue in its glass production plant joint venture.

The gross margin of the wine and spirits business contracted 70 basis points to 44.7% due to the impact of an unfavorable product mix.

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Expansion in operating margin

Constellation Brands’ operating margin expanded to 28.2% in the third quarter of fiscal 2019 compared to 27.2% in the third quarter of fiscal 2018. This improvement was driven by a higher operating margin in the wine and spirits business partially offset by a contraction in the operating margin of the beer business.

The operating margin of Constellation Brands’ beer business contracted 60 basis points to 37.3% as higher operational costs and increased marketing spending more than offset the impact of favorable pricing and the improvement in its SG&A (selling, general, and administrative) expense rate. The beer business incurred higher marketing expenses to support the growth of its new Corona Premier and Corona Familiar products and its other growth initiatives.

The company’s wine and spirits business’s operating margin expanded 70 basis points to 27% in the quarter driven by an improvement in its SG&A expense rate and higher pricing, partly offset by an unfavorable mix. The business’s SG&A expense rate improved due to lower expenses as a result of a head count reduction and certain cost-saving measures.

Looking forward, Constellation Brands expects higher transportation costs and a rise in depreciation expenses to be a drag on its fiscal 2019 margins.

We’ll look at analysts’ reaction to Constellation Brands’ results in the next article.

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