Investors had modest expectations heading into Constellation Brands' (NYSE:STZ) third-quarter earnings report on Wednesday. The alcoholic beverage giant has been enjoying strong growth in its beer portfolio, but the wine and spirits segment has been slumping. Those uneven trends, combined with financial challenges stemming from its investment in marijuana specialist Canopy Growth (NYSE:CGC) added uncertainty to this formerly high-flying stock.
This week's earnings announcement answered key questions in a few of these areas, but it also showed that investors will need to be patient as they wait for clarity during this turbulent time for Constellation's business.
Let's take a closer look.
The beer segment was again the standout performer for the consumer stock, with depletion (an industry metric that tracks consumption) rising 7%. That result marked an acceleration over the prior quarter's 6% boost and was a testament to Constellation's many popular imported beer franchises. Modelo enjoyed a 15% depletion spike in the period, securing its place as the country's fourth best-selling beer. Corona continued its winning streak, too, with depletions rising 7% thanks to healthy demand for core products like Corona Extra and new launches like Premier and Refresca.
The beer business became significantly more profitable, with operating margin rising 2 percentage points to 39% of sales.
As for wine and spirits, depletions continued to fall under the weight of Constellation's major brand sale to E.J. Gallo. Still, the rebound that management had predicted in its so-called "power brands" finally occurred. That niche, which includes Kim Crawford and Meiomi wines along with Svedka vodkas, expanded 4% to reverse last quarter's 3% drop.
Constellation's Canopy Growth investment continued to add volatility to reported earnings, with non-cash losses amounting to $71 million compared to $55 million last quarter.
Investors are bracing for a sharp slowdown in beer sales in the fourth quarter, but that deceleration is mostly due to the timing of shipments that resulted in a huge volume increase in the year-ago period. CEO Bill Newlands and his team say that situation will pressure growth in Q4 by a bit more than expected, so the company is now projecting beer sales gains of between 7% and 8% rather than its prior target range of 7% to 9%. On the bright side, lower input costs and rising prices have combined to improve the beer segment's earnings profile, and operating income is now set to rise a bit faster than executives predicted back in October.
Constellation is still expecting the wine and spirits divestment to pave the way for depletion growth and rising margins in that segment, yet the latest results didn't show much concrete evidence on that score. Yes, power brands are growing again. Yet operating margin fell slightly and overall depletion volumes are still falling.
In a nod to those mixed financial and operating results, Newlands noted that fiscal 2020 is "shaping up to be a dynamic year" that includes the divestment of many alcoholic beverage brands that commanded lower prices. Constellation is optimistic that the remaining portfolio will support faster, more profitable growth. Yet its fiscal 2021 success will also depend on favorable consumer reception of new brands like Corona Seltzer and Crafters Union Bubbles, which will be launching over the next few months.