Constellation Brands (STZ +1.31%) is the beer, wine, and spirits company behind top brands including Corona Light, Meiomi, and Svedka vodka. This week, it reported its results from its latest fiscal quarter, showing that demand for those brands and others is increasing, allowing management to boost its outlook for the rest of the year. Here's what you should know about Constellation Brands' recent performance and its forecast.
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Constellation Brands: The raw numbers
The company's net sales grew at a low-single-digit pace year over year in fiscal Q1, 2020. Operating income dipped slightly because operating margin fell to 29.7% from 30.6% one year ago. An unrealized loss on its investment in marijuana stock Canopy Growth caused it to report a $245 million net loss in the quarter. However, if you back out the negative impact associated with Canopy's losses and declining share price last quarter, its comparable earnings per share improved 9% year over year to $2.40.
| Metric | Q1 FY 2020 | Q1 FY 2019 | Change |
|---|---|---|---|
| Net sales | $2.1 billion | $2.05 billion | 2% |
| Operating income | $623 million | $625 million | (0.32%) |
| Net income | ($245.4 million) | $743.8 million | N/A |
| Diluted EPS | ($1.30) | $3.93 | N/A |
Data source: Constellation Brands. EPS = earnings per share. FY = fiscal year. N/A = not applicable.
What happened with Constellation Brands?
In the fiscal first quarter, the company:
- Delivered 7.4% net beer sales growth.
- Beer operating income increased 11.7% year over year to $581 million.
- Generated operating cash flow of $593 million and free cash flow of $437 million, up 18% and 30%, respectively.
- Forecast that the sale of some of its wine and spirits brands to E & J Gallo Winery for approximately $1.7 billion will close in the second half of the year.
- Wine and spirits sales declined 7.8% year over year, leading to a 4.2% drop in wine and spirits operating income.
Beer shipment volume rose 5.4% because of strong demand for Modelo Especial and Corona Premier. Net beer sales were $1.48 billion, and segment operating margin increased 1.5% because of favorable pricing.
Shipments in the wine and spirits business declined 8.1% in the quarter. As a result, net wine and spirit sales fell to $620 million from $672 million in the same quarter last year. Segment operating income was $161 million, down from $168 million one year ago.
What management had to say
CEO Bill Newlands expressed optimism, highlighting strength in key wine and spirit brands it isn't selling and strong beer sales, particularly for Corona and Modelo:
Our wine and spirits transformation strategy is working, led by our collection of Power Brands, which delivered industry leading depletion growth of 4% during the quarter. In addition, our iconic beer portfolio continues to be a cornerstone of growth in the U.S. beer industry driven by double digit depletion growth for Modelo Especial and Corona Premier.
CFO David Klein focused on improving cash flows and financial flexibility:
We achieved operating cash flow growth of almost 20% and increased our EPS and cash flow projections due to the revised timing of the wine and spirits transaction. In addition, the recent revision to the duration of Canopy Growth warrants provides incremental long-term flexibility for cash deployment to shareholders.
Looking forward
Constellation Brands came into the quarter forecasting fiscal 2020 earnings per share of between $8.50 and $8.80 on a comparable basis, down from $9.34 in fiscal 2019. After its better-than-projected fiscal first-quarter performance, it now expects comparable-basis EPS of $8.65 to $8.95.
The guidance is based on assumptions of 7% to 9% net beer sales growth and a 20% to 25% decline in wine and spirits sales following its divestitures. With free cash flow anticipated to exceed $1.2 billion, it should have financial flexibility to execute its transition while maintaining its $0.75 quarterly dividend payment.
