Shareholders of Constellation Brands (STZ +1.89%) have some good reasons to celebrate. In late June, the alcoholic beverage giant reported solid first-quarter results to kick off fiscal 2022. While there were stubborn challenges in the wine and spirits segment, the company's beer business is still booming, and helping deliver accelerating cash returns to shareholders.
Let's dive right in and take a look at what made this report shine.
Beer is winning
The beer business showed why Constellation Brands is a leading competitor in this space. While depletion, a measure of consumer sales, wasn't as high as it has been for Boston Beer, the company gained market share in the niche. Modelo grew at a 12% year-over-year rate, and the Corona franchise rose 7%, thanks to popular new introductions like a hard seltzer brand. Pacifico notched a 35% depletion spike to help push overall beer growth to 11% year over year in Q1.
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Constellation Brands also returned to growth in its on-premises sales channels, which deliver drinks to places like restaurants and bars. Its retailing niche, meanwhile, continued to grow at a healthy clip. Management credited robust consumer demand with keeping growth at roughly 10%. "We're emerging from the pandemic in a position of strength," CEO Bill Newlands said in a press release.
Profits grew at a quicker rate as price increases offset added marketing and input expenses, and operating income jumped 16% in the beer segment.
Wine struggles
The news wasn't as good in the wine division, which continues to struggle. Investors had been hoping to see that segment return to growth following a portfolio restructuring over the last year. Yet depletions fell 8%, and operating income sank 36%.
That slump was driven by temporary factors (like supply chain challenges and a tough comparison with early fiscal 2021) that should reverse over the next few quarters. Constellation Brands is targeting better in-stock levels and pricing for the brands, which include Meiomi and Kim Crawford wines. Despite the rough start to the year, executives confirmed 2022 goals that call for modest growth and rising profitability in the wine and spirits division.
Looking ahead
Constellation Brands either affirmed or boosted all the key aspects of its growth outlook. Management still sees the beer business expanding 7% to 9% in 2022, while operating income is predicted to lag slightly. The earnings forecast got a slight upgrade, with adjusted profits on pace to land between $10 and $10.30 per share. That prediction was between $9.95 and $10.25 per share back in early April.
Free cash flow is still expected to land between $1.4 billion and $1.5 billion, which will give executives flexibility in allocating cash toward capital projects like their Mexican brewery expansion and their commitment to the Canopy Growth partnership.
And if investors were worried about the company's cash-return commitment, those concerns should be easing. Constellation Brands raised its stock buyback outlook after spending $500 million on repurchases this quarter. Management aims to send about $5 billion to shareholders through dividends and buybacks over the next two fiscal years.
Overall, the results mark a strong start to Constellation Brands' new year, and they confirm many of the key reasons this is an attractive growth stock. The company has a leading spot in many niches for premium alcoholic beverages, and its gushing cash flow gives management all the resources it needs to lay the groundwork for long-term earnings growth.
