Constellation Brands (NYSE:STZ) has the wind at its back. The alcoholic beverage giant recently announced quarterly earnings results that edged past management's sales and profit expectations thanks to robust demand for its imported beer franchises.
In a conference call with Wall Street analysts, CEO Rob Sands and his executive team explained the drivers behind that beer overperformance while cautioning investors to expect more modest growth from the wine segment of the business. Management saved its most optimistic comments for the emerging cannabis space, though, which the company is now targeting through a massive new investment in Canopy Growth Corp. (NYSE:CGC).
Maintaining beer momentum
[Beer consumption] growth showed continued strength at 10%, as we won the key summer selling season with excellent execution across all channels. Beer operating margin increased 10 basis points to a record 41.3%, as benefits from pricing and strong operational performance were offset by higher transportation costs and marketing investments.
-- CFO David Klein
Constellation Brands' beer portfolio extended its impressive growth streak, with depletion, a key metric that measures retailer sales, stopping at 10%. That rate translates into significant market-share gains that management credited to the core premium import brands of Corona and Modelo. The launch of Corona Premier, the first national addition to the Corona franchise in almost 30 years, is tracking ahead of expectations and has quickly become the 10th-largest brand in the U.S. premium import segment.
Overall selling prices continued inching higher, but most of that gain was offset by increased shipping costs and higher marketing spending to support the new brand launch. Constellation Brands still managed to push profitability in the segment to a new high of 41.3% of sales.
While our fiscal 2019 wine and spirits guidance of net sales and operating income growth of 2% to 4% ... remains intact, we are facing some challenges with the low end of our portfolio that make our targets challenging to achieve.
The wine and spirits division turned in a mixed performance, as gains in the premium categories, particularly wine priced at $11 per bottle and above, offset sluggish results in other niches. Constellation Brands called out weak selling conditions in the value segment of the wine market as a key factor behind the flat overall consumption figure for the quarter.
Executives still see sales and profits inching higher in this division in fiscal 2019, but growth might end up at the low end of their target range. Looking ahead, the company is evaluating portfolio cuts that will help it redirect resources toward its better-performing, high-end wines and spirits.
Getting aggressive on cannabis
With our focus on continuous growth, we've recognized the significant opportunity that the emerging cannabis space presents as potentially one of the significant global growth opportunities of the next decade. Our incremental $4 billion investment increases our interest in Canopy to approximately 35%.
Constellation Brands is taking its third -- and by far largest -- bite out of Canopy Growth with a new $4 billion equity purchase. It's the biggest investment in the cannabis space to date, management noted, and it also marks the company's most aggressive capital move since its 2013 acquisition of the imported beer portfolio that has powered its epic stock rally.
Like the Corona acquisition, this investment is also a risky initiative with an unclear payoff. But management said that they've seen the cannabis-infused consumer products space open up more quickly than they expected in recent quarters, and so they aim to get ahead of the trend by purchasing a 35% stake in the largest publicly traded company in the industry. Constellation Brands has the option to expand that ownership level to over 50%, management said, if this unproven global niche starts delivering on its outsize potential.