Constellation Brands’ Q3 Earnings Impressed Investors



Constellation Brands (NYSE:STZ) stock gained 3.6% on January 8 after the company beat analysts’ earnings forecast for the third quarter of fiscal 2020. It also raised its full-year earnings guidance. The company’s third-quarter adjusted EPS fell 9.7% YoY (year-over-year) to $2.14. However, it significantly exceeded analysts’ EPS estimate of $1.83. The company’s net sales increased 1.4% YoY to about $2.0 billion, higher than analysts’ forecast of $1.95 billion.

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Constellation Brands’ third-quarter earnings

Constellation Brands’ third-quarter adjusted EPS included equity losses of $0.25 per share associated with its investment in cannabis player Canopy Growth (NYSE:CGC). The company has recognized $223 million worth of unrealized net gains on a reported basis since it invested in Canopy Growth in November 2017. It recorded a $534 million decrease in the fair value of its investments in Canopy in the third quarter. In comparison, it recognized a reduction of $839 million in the fair value of its investments in the second quarter.

On Constellation’s third-quarter conference call, CEO Bill Newlands sounded optimistic about Canopy Growth’s prospects. The company’s bullish stance is based on an increase in the number of customers who purchased cannabis from the legal market in Canada. Constellation also cited higher retail store sales during the last year in the Canadian cannabis market. The company sees further growth in retail sales via products such as vapes and edibles under Cannabis 2.0.

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Constellation Brands’ CFO, David Klein, will assume the role of Canopy Growth’s CEO effective January 14. The company believes that the new leadership will help Canopy Growth implement its strategic goals in a disciplined manner. Investors are concerned, though, as Canopy hasn’t generated any profits yet. Its stock fell 21.5% on the NYSE in 2019.

Segment income

Apart from the losses related to Canopy Growth, Constellation’s Wine and Spirits segment’s lower operating income also affected its earnings. The segment’s operating income fell 12.4% YoY to $180.4 million as the business faced lower volumes and higher costs.

In contrast, the Beer segment’s operating income rose 14.2% YoY to $514.9 million. Strong top line growth and higher pricing boosted the segment’s profitability.

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Constellation Brands’ Beer sales continued to dominate

Constellation Brands’ Beer segment’s sales grew 8.3% to $1.31 billion, reflecting higher volumes and increased pricing in certain markets of its Mexican beer portfolio. Continued consumer demand, increased marketing efforts, and new product launches drove a 6.8% rise in beer shipment volumes.

The company’s Modelo Especial beer depletions saw 15% growth. The company experienced continued strength in the Corona Premier, Corona Refresca, and Corona Extra brands.

In comparison, sales in the Wine and Spirits segment fell 9.7% YoY to $688.8 million. These lower sales reflected a 13.5% fall in shipment volumes and the impact of the divestiture of the Black Velvet Whisky business. The segment’s performance reflected the impact of the agreement with E. & J. Gallo Winery to sell certain lower-margin wine and spirits brands.

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Revised outlook

Constellation Brands raised its fiscal 2020 adjusted EPS outlook (excluding Canopy’s equity earnings or losses) to the range of $9.45–$9.55. The company’s prior adjusted EPS outlook was $9.00–$9.20. The company now expects the Beer segment’s net sales to grow in the range of 7%–8% compared to its prior growth outlook of 7%–9%. Meanwhile, it’s revised its Beer segment’s operating income growth forecast to the range of 8%–9%. Previously, it expected the segment’s operating income growth to be in the 7%–9% range.

The company expects the fiscal 2020 net sales and operating income of the Wine and Spirits segment to fall in the range of 8%–10%. It had earlier expected sales in the range of 15%–20% and a 25% fall in operating income. The updated outlook for the Wine and Spirits business reflects the impact of its revised agreement with E. & J. Gallo Winery.

Constellation Brands is streamlining its product portfolio and focusing on high-end brands to drive its profitability. The company recently announced the sale of craft beer brand Ballast Point. It’s also launching Corona Hard Seltzer this spring. The company will introduce this product in four flavors: tropical lime, mango, cherry, and blackberry lime.

The demand for hard seltzers is increasing in the US. Constellation Brands is looking to expand in this market and will compete with brands such as White Claw and Boston Beer’s Truly brand.


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