Image source: Constellation Brands.
Constellation Brands, Inc. (STZ +0.07%) submits its fiscal second-quarter 2017 scorecard on Oct. 5, before the markets open. Let's briefly review key items of interest to shareholders when the alcoholic-beverage manufacturer and distributor releases earnings next week.
Top-line growth should be in the double digits
Probably the first number investors will look for on Tuesday is the pace of Constellation's revenue growth. The company doesn't provide quarterly guidance, but in keeping with recent trends, year-over-year top-line acceleration should fall somewhere at or above 10%. For comparison, in fiscal first-quarter 2016, Constellation managed a 15% revenue improvement versus the comparable quarter.
This cadence of revenue growth reflects Constellation's evolution since its massive 2013 purchase, and subsequent expansion, of its Mexican beer portfolio. The beer business, led by labels such as Corona, Modelo, and Pacifico, now accounts for roughly 62% of the company's total revenue. Beer as a segment grew at a rate of 19% last quarter. This portfolio is counterbalanced by the wine and spirits segment, characterized by more modest expansion, but higher profitability. Wine and spirits posted an aggregate growth rate of 8% last quarter.
Taking into account the company's full-year outlook for a 14% to 17% increase in beer revenue, and a mid- to high-single-digit increase in wine and spirits, implied total revenue growth for each quarter falls in the low to mid-teens. Thus, shareholders should worry over the full-year outlook if Q2 2017 revenue falls below 10%.
Beer depletion trends
Related to the above, in the company's fiscal first-quarter earnings call, CEO Rob Sands addressed data from research firms IRI and Nielsen, which showed some volatility in -- and by extension, possible slowing of -- beer purchases through consumer-retail channels (that is, beer purchased in stores).
Sands noted that the data only covers about 50% of Constellation's beer sales. He also argued that beer depletion, a more complete metric, proved to be quite robust at 10% in the first quarter. Depletion is a measurement in the alcoholic-beverage industry which tracks cases sold by a distributor to retailers during a given period.
In Q2, I'm looking for depletion growth similar to Q1 of roughly 10%. A wide variance -- above or below -- will speak to the relative health of beer volumes through the first half of the year.
Full-year outlook: Keeping the status quo
The second fiscal quarter is an extremely important one so far as full-year guidance is concerned. After two quarters, a company looks ahead to the back half of the year with six months of data in its pocket, and has a sense of its earnings capacity due to partial-year trends.
Investors should expect Constellation to affirm that its target for full-year diluted earnings per share (EPS) of between $5.98 and $6.28 is still intact. Last year, Constellation upped its EPS outlook when it released fiscal second-quarter earnings, so it's possible that this may occur again. A downward revision would be unexpected -- and, of course, unwelcome.
Premium-brand volume acceleration
An important component of Constellation Brands' overall business strategy is the acquisition of small, premium brands in the craft beer, wine, and spirits categories. Constellation has initiated three such purchases over the last thirteen months, acquiring high-end pinot noir label Meiomi, the highly regarded craft-beer brewery Ballast Point, and the "super luxury" wine portfolio of The Prisoner Wine Company.
Each of these brands is undergoing a typical Constellation post-acquisition process of expanded manufacture and distribution, originating on the West Coast and heading east across the country. Last quarter, depletion rates for Ballast Point hit 60%, and Meiomi achieved "double-digit depletion" due to this strategy.
Of these three purchases, The Prisoner Wine Company is the most recent transaction, with an acquisition completion date of April 29, 2016. We should see some initial data from Q2 on this latest addition, and overall, Constellation will likely show double-digit depletion across all three labels. It's important to keep track of Constellation's tuck-in acquisitions, as the company's scaling up of high-end brands provides diversification against the rapid expansion of the Mexican-beer business.
Canadian IPO update
A final big-picture item for shareholders to follow: an update on the status of Constellation's proposed IPO of its Canadian wine business. Spinning off its market-leading wine operation in Canada will allow the segment to grow without being constrained by Constellation's sprawling structure and competing resource-allocation priorities. The offering is estimated at 1 billion Canadian dollars, or about $760 million in U.S. dollars at current exchange rates.
Last quarter, management had no substantial news to report on this front, but promised to report any progress to shareholders "as soon as possible." I expect that executives will have a tangible timeline to announce soon, possibly alongside Q2 earnings, so stay tuned. If you'd like an in-depth understanding of how the spinoff will affect Constellation's overall operations, you can read my analysis here. And if an IPO is indeed in the works, we'll cover the implications post-earnings.
