Investors had high expectations heading into Constellation Brands (STZ 0.64%) fiscal third-quarter announcement this week. The alcoholic beverage giant has, after all, trounced rivals lately due to the blockbuster performance of its premium imported beer portfolio.
The earnings report didn't disappoint. The company soaked up more market share in its beer segment, kept its wine and spirits division on track for healthy growth, and raised its profit outlook as production costs fell.
More on that new earnings forecast in a moment. First, here's how the headline results compare against the prior-year period:
|
Metric |
Q3 2017 |
Q3 2016 |
Change (YOY) |
|---|---|---|---|
|
Revenue |
$1.8 billion |
$1.81 billion |
(1%) |
|
Net income |
$491.1 million |
$405.9 million |
21% |
|
EPS |
$2.44 |
$1.98 |
23% |
Data source: Constellation Brands' financial filings. YOY = year over year.
What happened this quarter?
The company met management's aggressive goals for growth in both the beer and wine segments. Constellation Brands' finances improved at the same time, thanks to the powerful combination of rising organic sales, higher prices, and lower costs.
Image source: Getty Images.
Highlights of the quarter included:
- Beer sales increased 8% thanks to strong demand across the Corona and Modelo franchises. Constellation Brands was responsible for 80% of consumption growth in the beer industry following market-beating results around the Labor Day and Thanksgiving holidays.
- Prices increased in the beer division, which, along with lower production costs, helped push operating margin up nearly 3 percentage points to 37.7% of sales.
- Wine and spirit sales were flat after accounting for the divestment of the company's Canadian wine business. Profitability slipped as the company increased marketing support for its brands, but the extra spending kept the division on target for 5% growth in fiscal 2018.
What management had to say
In a press release accompanying the results, CEO Rob Sands and his executive team highlighted what they saw as the company's key wins during the quarter. The beer portfolio "claimed 4 of the 'Top 10' [market] share gainer positions," they said, which helped Constellation Brands represent 80% of all growth in the U.S. beer industry. Meanwhile, "we continue to make smart investments," Sands explained, "with the planned addition of a fifth furnace at our glass production plant" set to reduce supply costs.
The company's improving cash flow is giving it plenty of room to make investments like that while still making major acquisitions such as its new interest in medicinal marijuana. "We have significant capital allocation flexibility to invest in our business and return cash to shareholders," Chief Financial Officer David Klein said.
Looking forward
Executives raised their 2018 profit outlook for the third time this fiscal year, and they now see earnings coming in at $8.40 to $8.50 per share, up from the prior target range of $8.25 to $8.40. The beer segment is still expected to expand by roughly 10%, while the wine and spirits division will grow at the same 5% rate that management initially targeted. Both businesses are forecast to improve profitability and help overall operating margin expand beyond 30% of sales.
Constellation Brands is on pace to generate $775 million in free cash flow in 2018 even after spending over $1 billion on expanding its Mexican breweries. From there, its cash flow outlook should brighten, as its biggest capital investments will be behind it. That will leave the management team even less financially constrained as they hunt for new brand purchases and decide how much to allocate toward direct shareholder returns in the form of dividends and stock repurchases.
