What to Watch in Constellation Brands' Earnings This Week

Look for surging beer sales to power strong results as profitability expands.

Demitrios Kalogeropoulos
Demitrios Kalogeropoulos
Jun 25, 2017 at 5:37PM
Consumer Goods

Constellation Brands (NYSE:STZ) is set to post fiscal first-quarter results before the market opens on Thursday, June 29. The stakes are high for the alcoholic beverage giant, given that shares have trounced the market so far in 2017.

Below, we'll look at a few key operating trends that might determine whether that rally continues through the second half of the year -- or falls flat.

A pint of beer.

Image source: Getty Images.

Sales growth

The alcoholic beverage category is one of the few packaged foods segments that are expanding right now. And almost all of the industry gains are coming at the high end of the business.

That puts Constellation Brands, with its powerhouse Corona brand, in an unusually strong position. Corona, the country's top-selling premium beer, joins Modelo, Corona Light, and Pacifico to create a portfolio that dominates the high-end beer segment and has generated impressive sales growth for the company. Beer sales rose 17% in the past year, helping overall revenue rise 12%.

STZ Revenue (TTM) Chart

STZ Revenue (TTM) data by YCharts.

CEO Rob Sands and his team believe the beer business will continue fueling market-beating growth as consumers increasingly opt for its pricier brands and as Constellation Brands takes advantage of new distribution avenues and favorable demographic trends. For fiscal 2018, executives' initial outlook targets beer growth of 10% at the midpoint of guidance, or double the expansion pace from its spirits and wine segments.


Operating income should grow at an even faster pace of 11% to 13% as the company benefits from the type of rising prices that can only be supported by robust demand. This is part of a long-term trend for Constellation Brands: Gross profit spiked by 20% last year after rising by 17% the year before. As a result, profitability is an all-time high of nearly 50% of sales.

STZ Gross Profit Margin (TTM) Chart

STZ Gross Profit Margin (TTM) data by YCharts.

Again, it's the beer business that investors can thank for these gains. Since fiscal 2013, before Constellation Brands acquired its way into this alcoholic beverage segment, operating margin hovered around 20% of sales. Today, it's closer to 30% -- and rising.

Spending plans and outlook

It will take major cash outlays for Constellation Brands to reach its aggressive long-term sales and profit goals. Its biggest investment priority today is boosting its beer production capabilities. That's why management is planning to spend $3 billion over the next four fiscal years on its Mexican plants to bring capacity up to 385 million cases per year, up from around 250 million cases today.

Sands and his team will also likely keep hunting for targeted acquisition ideas that fill gaps in its portfolio and provide added growth opportunities. A few of the latest purchases, including the Meiomi wine brand and the Casa Noble spirits franchise, fit that bill and helped the company move its portfolio toward the higher end of each category.

Over the next three years, Constellation Brands believes it can average 10% annual earnings growth that's powered by steady gains in spirits and wine and blockbuster results from the beer segment. Capital spending should peak in fiscal 2018, allowing free cash flow to begin expanding at a healthy clip, likely passing $1 billion by 2019.