Today's stock market
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Technology stocks led the market south, with the Technology Select Sector SPDR ETF (NYSEMKT:XLK) falling 1.8%. The financial sector ticked up after all major banks passed their stress tests, and the SPDR S&P Bank ETF (NYSEMKT:KBE) rose 1.7%.
Rite Aid reports weak results and a canceled merger
The long-awaited merger between Rite Aid and Walgreens Boot Alliance was called off today, with the companies announcing that Walgreens will be purchasing 2,186 Rite Aid stores and three distribution centers instead. Walgreens will pay $5.175 billion in cash for the stores as well as a termination fee of $325 million for ending the deal. Rite Aid also announced fiscal first-quarter results that were substantially below analyst expectations, and the one-two punch sent the company's shares down a whopping 26.5%.
With Federal Trade Commission approval of the merger in doubt, officials from the two companies clearly thought this agreement was better than nothing. Rite Aid Chairman and CEO John Standley said in the press release: "While we believe that pursuing the merger with WBA was the right thing to do for our investors and customers, this new agreement provides a clear path forward and positions Rite Aid as a strong, independent, multi-regional drugstore chain and pharmacy benefits manager with a compelling footprint in key markets."
The earnings report highlighted the need for Rite Aid to salvage some sort of deal. Revenue declined 4.9% to $7.8 billion, resulting in an adjusted net loss of $0.05 per share. Analysts were expecting a loss of $0.01 on $8.17 billion in sales. Same-store sales declined 3.9%.
Cash from the deal will allow Rite Aid to get out from under its heavy debt load, but investors were not happy with the outlook for the company's business going forward. With Walgreens no doubt cherry-picking the stores in the best locations with the least competitive exposure to its own stores, Rite Aid's problems, as demonstrated by its latest results, may only get worse.
Constellation Brands' refreshing quarter
Shareholders of Constellation Brands raised their glasses today to toast the company's fiscal first-quarter results. The purveyor of beer, wine, and spirits saw sales increase 3% to $1.94 billion, and comparable earnings per share came in 52% higher than last year at $2.34. Analysts were expecting slightly higher revenue, but earnings of only $1.98. Constellation shares gained 5% following the report.
Sales of beer, the company's largest segment, were particularly strong with 8% growth, and depletions -- the sales from distributors to retail locations -- were up 11.6%. Beer operating income increased a surprisingly high 22% due to lower costs and higher pricing. Wine and spirits sales decreased 4%, but after subtracting the effect of a divestiture, organic sales grew 6%, and the business delivered significant margin improvement and matched the beer business with a 22% increase in operating income.
The company raised guidance for full-year comparable EPS growth to 18% and projected beer sales for the year to come in 9%-11% higher than the year before. Chief Financial Officer David Klein said in the press release: "We continue to deliver impressive financial results, especially for our beer business, which is driving the upward revision to our EPS guidance for the year."
Constellation's strong results in the beer category stand in stark contrast to struggles that other companies are having in a domestic beer market that is not growing. CEO Rob Sands said on the conference call that losses by the national premium brands are fueling growth of craft beer and high-end imports such as the company's Corona, Modelo, and Pacifico brands. It's evident investors found Constellation's results and outlook quite refreshing.