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How Constellation Brands’ Margins Fared in Fiscal 2019

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Apr. 9 2019, Published 12:03 p.m. ET

Gross margin expansion

Constellation Brands’ (STZ) gross margin increased about 170 basis points to 49.7% in the fourth quarter of fiscal 2019, which ended on February 28. The company’s gross margin increased both across its beer as well as wine and spirits segments. Its beer gross margin expanded 50 basis points to 53.8%, driven by pricing and favorable forex movements, partially offset by higher transportation costs. Gross margin of Constellation Brands’ Wine and Spirits segment grew about 40 basis points to 44.0% as favorable pricing was partially offset by higher grape and transportation costs.

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For the full-year fiscal 2019, Constellation Brands’ gross margin remained flat at 50.3%. The beer gross margin improved ten basis points to 54.4% as the impact of higher pricing was partially offset by higher costs of goods sold mainly resulting from increased transportation costs. The Wine and Spirits segment’s gross margin declined 90 basis points to about 43.9% in fiscal 2019 due to higher freight and transportation costs.

Constellation Brands’ operating margin contracted to 25.9% in fiscal 2019’s fourth quarter compared to 29.0% in fiscal 2018’s fourth quarter due to transaction, integration, and other acquisition-related costs associated with the investment in Canopy Growth (CGC). The beer segment’s operating margin improved about 250 basis points to 40.5% due to higher gross margin and a lower marketing expenses rate. The Wine and Spirits segment’s operating margin increased 60 basis points to 27.7% in the fourth quarter due to gross margin expansion and improvement in the SG&A expense rate.

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For fiscal 2019, the company’s operating margin declined about 40 basis points to 29.7% due to lower operating margins of both the segments. The Beer segment’s operating margin declined 20 basis points to 39.3% due to higher marketing expenses incurred to support new launches. The Wine and Spirits segment’s operating margin fell 70 basis points to 26.5% due to lower gross margin and an unfavorable mix.

Margin outlook

Constellation Brands forecasts the gross margin of its beer business to remain almost unchanged in fiscal 2020 as the impact of cost inflation is expected to be offset by improved product pricing and productivity efforts.

Constellation Brands’ decision to sell 30 value-end brands of its wine and spirits portfolio will help it in directing its resources to premium brands. Constellation Brands believes that this divestiture will help in improving the operating margin of its Wine and Spirits segment to 30% compared to about 26% in fiscal 2019.

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