Investors had modest expectations heading into Constellation Brands' (STZ 0.34%) fiscal third-quarter earnings report, released this week. Growth in the alcoholic beverage industry is slowing after a spike during the earlier phases of the pandemic. That deceleration is combining with rising cost and supply chain challenges to dampen Wall Street's short-term outlook.
But the owner of hit imported beer brands like Corona navigated through those challenges to post solid sales and earnings results for the period that ran through late November. Management issued an optimistic outlook for the rest of the year, too.
Let's dive right in and take a closer look at three takeaways from the report.
1. Sales updates showed mixed results
Constellation Brands' growth story continued to show a split between its expanding beer business and its wine and spirits segment, which is still in transformation mode. Depletions, a measure of consumer sales, were up 8% in the beer unit thanks to rising market share for brands like Modelo and Corona Extra. That boost marked an acceleration from the prior period and beat most investors' expectations.
The wine and spirits segment contracted by 7%, meanwhile, as Constellation Brands continues feeling the pinch from portfolio divestments. Organic sales were up slightly, though, as the company capitalized on its narrower focus on premium beverages. "Our wine and spirits business continued to transform its portfolio and financial profile," CEO Bill Newlands said in a press release, "delivering high-end market share gains and margin expansion."
2. Margin pressure grows as production costs rise
Constellation Brands wasn't immune to the cost pressures impacting the industry. Operating margin fell in the beer business thanks to rising prices for materials like aluminum and glass, along with higher transportation costs. The company couldn't fully pass along those higher costs, but bigger price increases are on the way for its alcoholic products in 2022.
Cash flow trends remained solidly positive despite rising costs and Constellation's aggressive spending on upgrading its brewing network in Mexico. That project has been a major investment priority for management and is projected to require over $5 billion of spending over the next three fiscal years.
3. Looking ahead, there's reason for optimism
Constellation had a mixed update for investors with respect to its short-term outlook. While the beer business is on track to grow slightly quicker, at about 11% compared to the previous target of 10%, costs will take a bigger bite out of profitability. Management is still expecting to generate around $2.5 billion of operating cash flow this year, with roughly $1.5 billion left over as free cash flow after its capital investments.
The company made news in other arenas, too, announcing a new deal with Coca-Cola (KO -0.15%) in conjunction with this earnings report. The two beverage specialists will collaborate on bringing an alcoholic version of the Fresca brand to the market beginning this year.
That partnership adds another reason to be optimistic about Constellation Brands' long-term growth outlook, which is supported by its core beer business, a rebounding wine and spirits segment, and some big bets it has made on the nascent recreational marijuana space. While shareholders might have to endure a short period of declining profitability in the meantime, these initiatives should help keep Constellation Beverages near the top of its industry.