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How Constellation Brands Overcame a 75% Sales Slump at Bars and Restaurants

By Demitri Kalogeropoulos – Jul 8, 2020 at 6:45AM

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Management recently told investors how it kept the beer business growing through unprecedented challenges.

Constellation Brands (STZ 0.44%) recently reported earnings results for its fiscal first quarter. That period matches up almost exactly with the worst impact to date of the COVID-19 pandemic on consumers in general and on the bar and restaurant industry specifically. Yet the alcoholic beverage giant had good news for investors, including rising consumption in key beer and wine brands and a hit new launch in the growing hard-seltzer space.

In a conference call with Wall Street analysts, CEO Bill Newlands and his team detailed some of those wins while explaining their optimistic long-term outlook. Let's look at some highlights from that chat.

Friends drinking beer and wine together.

Image source: Getty Images.

Overcoming challenges

"Beer depletions remain strong and consistent with long-term trends despite the lost selling day in the quarter and the virtual shutdown of on-premise sales," Newlands said. "And our wine and spirit power brands continue to gain traction."

Just like its larger peers, Constellation Brands saw collapsing demand at bars, restaurants, and other entertainment venues. These on-premises sales dived 75%, in fact, which is on par with what Molson Coors and Anheuser-Busch InBev recently reported.

But a 20% sales spike at retailers like supermarkets and convenience stores more than picked up the slack so that overall consumption rose 7% in the beer division. Management estimates that its portfolio, which includes the Modelo, Corona, and Pacifico franchises, was responsible for 80% of the growth in imported beer demand across the country.

Constellation Brands also marked progress in the struggling wine and spirits segment, as illustrated by the growth in its power-brand unit (including Kim Crawford, Meiomi, and Woodbridge wines and Svedka vodka) and by increasing profitability. "Despite various headwinds, we delivered solid first-quarter business performance," Newlands said.

Market share wins

"The brand name Corona drove extremely good trial of Corona Hard Seltzer, and the great taste profile is driving a repeat purchase intent of almost 80%, which exceeded our expectations," Newlands said.

Constellation Brands saw strong early enthusiasm for its entry into the hard seltzer niche, and consumers followed that up with repeat purchases that helped give Corona Hard Seltzer a 6% market share in its first full quarter.

The Corona brand showed off its strength in other ways, too, including by showing soaring demand during mostly home-based Cinco de Mayo celebrations. Sales of the beverage at retailers around the holiday were nearly three times the volume that management is used to seeing at bars and restaurants.

Looking ahead

"Given the [COVID-19] related uncertainty, volatility and fast-moving developments that have evolved during the first quarter of our fiscal year, we still do not believe it is prudent or appropriate to provide formal financial guidance for fiscal 2021 at this time," CFO Garth Hankinson said.

Without issuing specific guidance, management cautioned about a few short-term headwinds, including increased costs from the temporary production shutdown in Mexico and the ending of some promotions in its wine and spirits segment. These pressures might reverse some of the depletion and operating-margin gains that investors saw at the start of the fiscal year.

But executives said their long-term growth picture is unchanged, with continued gains in market share expected in beer while the wine and spirits segment moves operating margin back up above 30% of sales.

In the short term, though, Constellation Brands is a bit more focused on directing more of its strong cash flow toward reducing its debt. While that might mean slightly lower direct cash returns to shareholders this year, that move provides potentially valuable flexibility during uncertain economic times.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands. The Motley Fool has a disclosure policy.

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