The stakes couldn't be higher heading into Constellation Brands' (STZ 1.02%) earnings release on Thursday, Oct. 5. After all, the alcoholic beverage giant's stock recently set a new high and is trouncing the market with a 30% gain so far this year.
To extend -- or even hold onto -- that rally, the company will need to post some impressive operating numbers this week. Here's a look at what investors can expect from its fiscal second-quarter report.
Market share gains
CEO Rob Sands and his executive team are targeting awesome sales growth of between 9% and 11% for its beer segment this year, which is an aggressive goal given that the broader industry isn't expanding. Beer giant Anheuser-Busch InBev (BUD 2.10%), owner of the Bud Light franchise, posted flat revenue in the U.S. in its most recent quarter.
Constellation Brands is expecting much stronger gains because its premium imported beers, anchored by the Corona and Modelo franchises, are in higher demand. The segment expanded at an 8% rate last quarter but depletions, a measure of volume, increased by an even stronger 12%.
The company didn't fare nearly as well with its wine and spirits portfolio, which shrank by 6% and kept a lid on overall revenue growth. Executives said in late June that this figure should improve beginning in the current quarter, thanks to a range of marketing and innovation initiatives they have in place.
Constellation Brands' strategy across its portfolio is to focus on the higher end of the market. That helps explain why average prices jumped in the booming beer division last quarter but also ticked higher in wine and spirits. These increases are pushing profitability to new records, as operating margin leaped higher by over 5 percentage points last quarter to 35% of sales.
If Constellation Brands can keep that momentum going, it will easily reach management's efficiency goal of adding roughly 10 percentage points to operating margin since 2014. The company will also establish itself as among the most profitable businesses in the industry.
Can Constellation keep on winning?
Since fiscal 2014, Constellation Brands has improved earnings at an almost 30% annual clip as net sales soared by 15% per year. The bad news for shareholders is that market-thumping growth pace isn't possible to sustain for very long, and so investors should brace for relatively weaker numbers ahead.
Specifically, management's long-term goals target high single-digit sales growth on the beer portfolio in each of the next three fiscal years and slightly lower, but still positive, gains in wine and spirits. Both segments should benefit from rising prices and from cost savings, including from the company's new Mexican breweries.
These shifts should allow Constellation Brands to improve earnings at a double-digit pace through fiscal 2020 to mark continued healthy profitability improvements. Better yet, the company plans to reduce its capital spending outlay after wrapping up its Mexico capacity expansion program this year. That should clear that way toward the business generating over $1 billion of free cash flow in fiscal 2019 -- doubling the result from just three years back.
Many things will have to go right for Constellation Brands to hit those aggressive financial targets. As a dominant force in the premium end of the industry, though, it has the wind at its back as it targets market share gains through innovation and increased beer and wine distribution over the next few years.