Constellation Brands (STZ -0.04%) has some big questions to answer for investors in a few days. The alcoholic beverage giant, which owns popular imported beer brands like Corona and Modelo, has trailed the market over the past year. Wall Street has been disappointed with slow progress in Constellation's rebound plan for the wine and spirits portion of its business. Shareholders are concerned about weaker demand in the hard seltzer niche, too.
Constellation Brands will likely have a mixture of good and bad news to report on these topics for the selling period that ended in early 2022. Let's take a closer look at what to expect from the results, due on Thursday, April 7, and how the stock might start delivering better returns from here.
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The sales trends
There's no shortage of growth questions heading into the announcement. Constellation brands showed solid strength in parts of its portfolio back in early January. But there were warning signs, too, including slumping demand for Corona hard seltzer and contracting sales in the wine and spirits segment.
Investors on Thursday will want to see progress in management's turnaround plan for that wine and spirits division, which ideally will return to growth in 2022. For context, it shrank 7% last quarter.
At the same time, look for Constellation Brands to report poor sales, and potentially some write-offs, around its hard seltzer products, given that rival Boston Beer recently described slowing sales in that arena. Constellation isn't as exposed to the niche, and so its overall beer volumes likely continued growing.
Margin pressures
There's no shortage of potential bad news that management can cite to explain weaker profitability this quarter. In addition to the write-offs associated with slumping demand for hard seltzer, costs have spiked on materials like glass and aluminum, and on labor and transportation.
CEO Bill Newlands and his team might mention these challenges, which won't be fully offset by price increases until mid-2022.
STZ Gross Profit Margin data by YCharts
Follow gross profit margin for evidence that Constellation Brands is finding ways to cut costs and raise prices through innovation, just as PepsiCo has in recent months. Investors are also hoping that the wine and spirits segment will start contributing to earnings growth this year after management has spent almost two years restructuring that division.
Looking ahead
Most investor attention will be on management's updated 2022 outlook. Heading into the report, Constellation Brands is targeting a solid 11% increase in its beer business as profitability edges lower. The wine and spirits segment should take a big step toward returning to growth while margins improve.
The stock's weak performance so far in 2022 suggests Wall Street is expecting some bad news on the earnings front thanks to the combination of rising costs and write-offs tied to the hard seltzer and recreational marijuana niches.
Those challenges are all temporary, though, which means investors might want to put Constellation Brands on their watch lists. Its diverse portfolio of premium alcoholic beverages is likely to support improving sales and profitability, just as it did for several years heading into the pandemic.
Those returns should be amplified over time as management's bigger bets, like upgrading the Mexican brewery network and investing in Canopy Growth, pay off down the line.
