Investors who are used to regularly strong earnings reports from Constellation Brands (STZ 0.53%) may be in for a surprise in the second quarter and for several quarters beyond.
The beer, wine, and liquor distributor is in unfamiliar choppy waters for its premier Corona brand and experiencing headwinds in its wine business and cannabis investment, meaning that when earnings are reported on Oct. 3, they may not be as robust as expected.
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An especially strong showing
Although Mexican beer remains a popular choice for beer drinkers, and in the week leading up to the recent Labor Day holiday Nielsen data indicated dollar sales were up 8.5% from the year-ago period, hard seltzer continues to dominate, with dollar sales up 175% year over year.
For Constellation, which largely owns the Mexican beer market with its Corona and Modelo brands, that's good news. Last quarter Corona Premier posted double-digit depletion growth while Modelo Especial saw depletions surge 17%. Depletions are sales to distributors and retailers, and are considered an industry proxy for consumer demand.
Yet the introduction of Premier and Corona Familiar have eaten away at some of the sales for its base Corona brands, Corona Extra and Corona Light. Although Constellation president and CEO Rob Sands brushed aside any cannibalization occurring with Extra, he admitted there was erosion happening with Light, but he said the brand as a whole is still holding up quite well and "consumer takeaway is very strong across the entire portfolio."
Hard seltzer still trending
The whole phenomenon of hard seltzer has caught more than one brewer unawares, and almost all are now racing to catch up and introduce their own versions. Constellation is no different. Earlier this year it launched Corona Refresca, which seems to be doing well, with sales data showing it was one of Nielsen's top 10 growth brands. It may be capitalizing on two trends: hard seltzer and Mexican branding.
Six hard seltzers were on the list, including drinks by White Claw and Boston Beer's Truly brand. But the Refresca assorted varieties pack was also included, and Especial made the list as well. Anheuser-Busch InBev's Michelob Ultra and Natural Light brands filled out the group. So Corona's revivification is still underway, and it looks like it's gaining traction.
Pushback in wine and weed
Wine and spirits suffered a 3% drop in sales last quarter and a 15% decline in operating earnings. While it was lapping some strong results from a year ago, depletions fell 4% and operating margins dropped 430 basis points, so it continues to expect cost pressures to weigh on it in the second quarter.
Things may improve in the back half of the year, and Constellation is looking for 2% to 4% sales growth from the segment for the full year, but CFO David Klein says the distributor is expecting "mixed benefits."
As for cannabis, Sands says Constellation's $4 billion investment in Canopy Growth (CGC 20.65%) continues to pay off, and it has recognized more than $700 million in gains since making the investment, but Canopy itself is still a major money-losing operation at the moment, and its stock has lost more than half its value over the past year. It's suffered weaker-than-expected cannabis sales in Canada and has seen two straight quarters of lower cannabis revenue.
Sands reiterated last quarter that it didn't invest in Canopy Growth as speculation on its stock. However, it may take a while for that investment to really pay off. The road to meaningful profits for Canopy Growth has been a difficult one. This is why Constellation recently supported the ouster of Canopy's founder and CEO in July.
Bet on beer
Constellation Brands' beer portfolio remains solid despite some choppy waters, and accounts for 60% of its revenue. Yet with improvements expected to begin arriving in the back half of the year, investors may find the second quarter less agreeable than what they're used to.
