Investors had good reasons to be cautious heading into Constellation Brands' (NYSE:STZ) earnings report this week. Rival alcoholic beverage giants have been posting sharp sales drops as drinking occasions plummeted in places like bars, restaurants, concerts, and sporting events.

While the maker of premium imported beers like Corona and Modelo did reveal collapsing demand in its on-premise sales channel, strong growth at supermarkets and convenience stores helped it post surprisingly good results overall. Constellation Brands also announced several big changes to its wine and spirits portfolio.

Let's take a closer look.

A man shops for beer at a grocery store.

Image source: Getty Images.

Beer and wine

The fiscal first quarter runs from March through May, so it captured the peak social-distancing efforts that kept restaurants and bars closed around the country. Constellation Brands wasn't immune to this pressure, and sales to those on-premises partners plunged 75%. This drop led to a 6% revenue decline in the beer segment and 7% weaker wine and spirit sales. Look a bit closer and you'll see mostly good news in both categories, though.

Constellation Brands established its new Corona Hard Seltzer as an instant winner in that growing niche, with 6% market share. Other Corona brands sold well, too, and Modelo continued its blistering double-digit sales growth. Overall, thanks to surging demand at convenience stores and other retailers, the company achieved a 6% boost in beer segment depletions, which characterizes consumer demand.

The wine and spirits segment was similarly strong. Sure, shipment volumes fell 9%. Yet depletion only ticked down 1% thanks to market share wins for brands like Kim Crawford, Meiomi, and Svedka.

Bubbly finances

Constellation's financial trends were more uniformly positive. Operating margin rose by 2.4 percentage points in the beer segment, to 42% of sales, and improved by the same amount in wine to push that unit's profitability up to 28% of sales.

Operating cash flow jumped to $687 million, up 16% from last year. Free cash flow gains were even better at 24%. "Our strong cash flow results," Chief Financial Officer Garth Hankinson said in a press release, "provide financial flexibility as we continue to focus on reducing our debt levels."

Looking ahead

Constellation Brands took advantage of that flexibility as it announced the acquisition of Empathy Wines, which targets higher-price-point products with a subscription selling approach. That purchase, in addition to extra divestments of lower-margin brands, should help management move toward its goal of pushing the wine portfolio's margin up above 30% versus 28% today.

All these portfolio moves, plus COVID-19's impact on consumer demand, are creating an unusually noisy fiscal year for the business. Net sales are down and Constellation Brands is reporting losses related to brand divestments and noncash changes in its Canopy Growth investments.

But the underlying growth picture is positive, with the beer business extending its eight-year market share winning streak even as it pushes into new growth areas like hard seltzer. Investors also can look forward to the wine and spirits segment finally starting to contribute to earnings and sales growth over the next few quarters, now that Constellation Brands has realigned that portfolio to match with its broader premium selling strategy.