Constellation Brands (STZ -0.11%) had investors worried heading into its fiscal fourth-quarter earnings report. The alcoholic beverage giant is facing several headwinds, including a costly restructuring of its wine and spirits business. The core beer division is dealing with soaring costs, too, even as consumer demand shifts away from previously popular niches like hard seltzer.
On April 7, the company eased a few of those growth and earnings concerns while delivering good news on cash flow. But management also issued a conservative outlook for the fiscal year ahead that includes higher spending.
Let's dive right in.
Sales are mixed
Sales trends were positive, as expected, but showed a few weak spots for the business. The beer division posted an 8% increase in depletions, a measure of consumer sales, during the latest quarter. Demand was strong for popular imported brands like Modelo and Corona, and Constellation gained market share in the premium beer niche.
On the other hand, its newly launched Corona hard seltzer product didn't contribute much to growth over the last few months. But at least Constellation Brands didn't have to take another round of write-off charges associated with collapsing demand for hard seltzers as Boston Beer did in its last report.
The wine and spirits segment is still shrinking with depletions down 7% as the company pivots away from its lower-margin products. Yet operating income rose 6% due to that focus on premium brands like The Prisoner pinot noir.
Earnings and cash flow
News was more uniformly positive on the financial side. Operating income growth outpaced revenue gains in the fiscal fourth quarter, and earnings rose even faster thanks in part to aggressive share repurchases. Constellation generated $1.7 billion in free cash flow for the year, which funded heavy investments into the brewery network along with rising cash returns.
"Our strong operating results and powerful cash generation capability enabled us to return almost $2 billion in capital to shareholders as part of our $5 billion commitment by the end of fiscal 23," CFO Garth Hankinson said. Constellation Brands is still planning to spend as much as $5.5 billion in the next several years to continue upgrading and expanding its brewing operation.
Investors got their first look at management's detailed fiscal 2023 forecast, which includes many of the same themes that dominated 2022. The beer business will lead the way forward on growth with sales rising between 7% and 9%. Earnings growth will be pinched, management warned, due to rising costs. The wine and spirits division will take another step toward stabilization, but sales should still decline slightly as margins expand.
Free cash flow will decline to a range of $1.3 billion to $1.4 billion as the company pours cash into its manufacturing chain. That is a key reason why the stock has underperformed the market over the last year. However, Constellation still represents a smart bet on future growth. Just as it did with major acquisitions in recent years, management is making aggressive moves aimed at lifting margins and accelerating sales gains.
These benefits won't materialize for some time, but patient investors shouldn't have any trouble waiting while Constellation Brands continues winning market share in the alcoholic beverage industry.