Constellation Brands' (NYSE:STZ) stock fell in the wake of its fiscal fourth-quarter earnings report. Investors looked past the good news the company announced on market share and profits to focus instead on the beer giant's prediction of rising costs ahead.

Constellation Brands will spend more in areas like marketing and packaging in fiscal 2022, according to executives, along with huge outlays in its Mexican brewery expansion project.

But these costly initiatives will bolster the company's already dominant position in the U.S. beer industry, management said in a conference call with Wall Street analysts. Let's look at some highlights from that discussion.

Man holding a shopping basket filled with beer bottles while lifting a beer bottle off a store shelf

Image source: Getty Images.

Winning market share

"The U.S. beer category is healthy and exhibiting strong growth led by the high-end segment," CEO Bill Newlands stated.

Constellation Brands estimates that the retail segment of U.S. beer (which excludes bar and restaurant sales) grew at a 15% clip during 2020 as the pandemic disrupted traditional demand trends. But the premium niche, which includes imported brands like Modelo and Corona, grew more than 25%.

The Modelo franchise was a standout this past year, rising to the third spot in the U.S. sales chart. Corona and its variations, including low-calorie Premier and the hard seltzer iteration, helped keep overall beer sales in solidly positive territory even as demand in the restaurant and bar segment plunged more than 50%.

That strong momentum has continued into early April. "Recent ... trends show that Constellation's beer business is significantly outpacing the total U.S. beer industry and is outperforming the high end of the beer market," Newlands said.

Wine and spirits struggles

"Our retained wine and spirits portfolio, excluding divested brands, delivered net sales growth of 5% for the year, driven by double-digit volume growth from Meiomi, Kim Crawford, and The Prisoner brand family," Newlands remarked.

The wine and spirits division is still pressuring overall sales thanks to management's restructuring project. Sales fell 7% for the full year as Constellation divested most of its lower-priced brands.

The remaining portfolio is growing sales and profits, though, despite weak demand and cost trends in the industry. The division should expand again in fiscal 2020 and management is still targeting an operating margin of at least 30% going forward.

Cost pressures ahead

"We believe this is the right strategy in order to support our beer business that continues to outperform the market, driven by robust consumer demand, and we are absolutely committed to satisfying these demands," CFO Garth Hankinson said.

Like Boston Beer did earlier in the year, Constellation Brands just told investors to watch out for significantly higher expenses over the short term. Competing in the hard seltzer niche requires extra packaging and manufacturing costs, for example, and glass is getting more expensive.

The company is also planning to spend almost $1 billion this year on its multiyear Mexican brewery expansion project. That initiative will last at least into fiscal 2025 before the spending pressure eases.

The capacity expansion will weigh on earnings this year, but Constellation Brands should still have plenty of cash it can put toward direct shareholder returns. It's a big bet that's likely to pay off for many years down the road, too, according to management. As one of the industry's fastest growers, Constellation's surest path toward solid long-term returns is to protect its market share lead -- even if that means reduced profits over the next few quarters.

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