Investors have grown a bit more cautious about Constellation Brands' (STZ +1.74%) business lately. The alcoholic beverage giant is still expanding sales at an impressive clip thanks to its booming beer segment. However, increased spending led to a rare drop in profitability last quarter, and management says that trend will reduce earnings growth throughout fiscal 2019 even though profit margins are still trending higher.
Meanwhile, Constellation Brands has several big projects in the works that should shape its profit profile over the coming years, including brewery expansions, new product launches, and a significant bet on cannabis-infused beverages. The company will update investors about each of these initiatives, along with its latest operating trends, on Thursday, Oct. 4.
Let's take a closer look.
Image source: Getty Images.
Sales trends
The company's latest sales results have been strong, with major market share gains showing up in the beer portfolio and smaller wins occurring in the wine and spirits segment. The beer division -- anchored by the Corona, Modelo, and Pacifico franchises -- posted a 9% spike in the first fiscal quarter, while the wine business grew 3%.
Constellation Brands is hoping to extend its positive momentum from the spring months that included the Cinco de Mayo and Memorial Day holidays. Investors are looking for continued healthy sales gains of around 9% for the second quarter. The company will also provide an update on its launch of the Corona Premier brand, the first major addition to the Corona franchise in over two decades. We'll find out on Thursday whether that product is resonating with customers as strongly as management had hoped.
Marketing costs
Constellation Brands is projecting slightly higher profit margins in both its beer and wine segments this fiscal year. However, in the first quarter, the wine and spirits division notched higher costs for grapes and transportation. The division posted rising marketing expenses, too. This pushed its operating margin down to 25% of sales from 29% a year earlier.
The beer business is on a slightly better trajectory. Operating margin dipped by 2 percentage points to 38% of sales in Q1 due to higher costs and ramped-up marketing spending in support of new brand launches like Corona Premier. These costs were mostly offset by higher selling prices.
Constellation Brands Operating Margin (TTM), data by YCharts. TTM = trailing 12 months.
Overall, CEO Rob Sands and his team are targeting underlying profit growth of about 10% in fiscal 2019 as they shift their focus toward supporting their most attractive brands. That would mark the first time in five years that earnings growth would fall short of 20%. Yet it should keep Constellation Brands well ahead of most industry peers.
Capital plans
Finally, look for executives to explain how the company's capital spending plans are going. Constellation Brands is on track to spend as much as $1.25 billion this year, primarily on expansions to its Mexican brewery network. Shareholders should get a progress report on Constellation's attempts to cater to the promising but unproven cannabis-infused beverage niche, too.
Ideally, these investments should lay the groundwork for many more years of profitable, sustainable sales growth. Sure, they'll reduce earnings and cash flow during the 2019 fiscal year. However, the company's impressive financial success since 2013 has given it plenty of resources that it can direct toward shoring up its premium market position while aggressively placing bets on its next phase of growth.
