Constellation Brands swings back to profit but guidance leaves analysts unimpressed

By Ciara Linnane

Stock falls more than 3% as analysts said guidance was underwhelming

Constellation Brands Inc. posted better-than-expected earnings for its fiscal second quarter, but the stock still fell more than 3% as analysts said they were underwhelmed by the company's guidance.

The company (STZ) posted net income of $690.0 million, or $3.74 a share, for the quarter to Aug. 31, after a loss of $1.15 billion, or $6.30 a share, in the year-earlier quarter. The company's adjusted EPS came to $3.70 while EPS excluding the impact of Canadian cannabis company Canopy Growth came to $3.80, well ahead of the $3.37 FactSet consensus.

Sales rose to $2.837 billion from $2.655 billion a year ago, also ahead of the $2.824 billion FactSet consensus.

The company's beer business posted a 12% increase in sales, driven by an 8.7% increase in shipments. Depletion volume, a metric that measures the number of cases sold by distributors to retailers, rose 7.9%, after rising 5.5% in the first quarter.

Modelo Especial's sales rose nearly 9%, and remained the top-selling brand in the U.S. beer segment, measured by dollar sales.

Modelo Especial replaced Anheuser-Busch's (BUD) Bud Light as the bestselling beer in the U.S. earlier this year, partly due to the backlash against Bud Light that began in April in response to its partnership with trans influencer Dylan Mulvaney.

See now: Anheuser-Busch InBev share price skids as Bud Light and other Budweiser brand sales deteriorate

In the wine business, Constellation's Meiomi and Kim Crawford brands saw sales rise 7%, while depletions rose 6%.

But overall wine and spirits sales were down 14% and shipments fell by 17.6%.

On a call with analysts, Chief Executive Bill Newlands said the wine and spirits business continues to face lower demand, particularly for mainstream brands, "reflecting continued consumer-led premiumization trends noted in prior occasions, which in turn affected overall performance in the second quarter."

The company is now expecting fiscal 2024 EPS of $9.60 to $9.80, up from prior guidance of $9.35 to $9.65. It expects adjusted EPS of $12.00 to $12.20, compared with an $11.72 FactSet consensus.

Beer sales are expected to grow 8% to 9%, while wine and spirits are expected to range from down 0.5% to up 0.5%.

The company's share of losses from Canopy Growth Corp. (CGC) (CA:WEED) came to $12 million, down from $650.7 million a year ago.

CFRA analyst Garrett Nelson reiterated his hold rating on the stock, and said the raised guidance was entirely due to the fiscal second-quarter beat, meaning earnings expectations for the final two quarters have actually gone down slightly

"While Constellation Brands has increased market share in recent months (Beer shipments were +8.7% Y/Y), we maintain a Hold as STZ is in the middle of a major capex cycle to expand to Beer capacity in Mexico, which should weigh on free cash flow," he wrote in a note to clients.

Bill Chappell at Truist, who also rates the stock a hold, said the numbers were good, but not good enough.

"With Bud Light weakness, (the) launch of Modelo Oro, (and) hot weather across the U.S., we believe the Street was hoping for a higher depletions raise and a higher guidance raise for the year (basically flowed through F2Q beat and lowered interest expense outlook)," Chappell wrote in a note.

"We also remained concerned about the growth potential for the Wine & Spirits segment (20% of total sales) which continues to grow below the category rates."

The stock has gained 4% in the year to date, while the S&P 500 has gained 11%.

-Ciara Linnane

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10-05-23 1337ET

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