Constellation Brands (STZ) Q4 Earnings & Sales Beat Estimates
Constellation Brands Inc. STZ
has delivered stellar fourth-quarter fiscal 2019 results, wherein
top and bottom lines surpassed estimates. With this, the company
reported positive earnings surprise in 16 of the last 17 quarters,
with the fifth straight positive sales surprise. However, investors
were unimpressed with the guidance for fiscal 2020 due to the
effects of the Canopy Growth CGC investment.
Though this Zacks Rank #3 (Hold) stock has gained 5.2% in the past
three months, it underperformed the industry’s 12.2% growth.
Q4 Highlights
Constellation Brands’ adjusted earnings in fourth-quarter fiscal
2019 declined 3% year over year to $1.84 per share but outpaced the
Zacks Consensus Estimate of $1.71. Moreover, reported earnings were
$6.37 per share, up 40% year over year.
Constellation Brands Inc Price, Consensus and EPS Surprise
Constellation Brands Inc Price, Consensus and EPS Surprise | Constellation Brands Inc Quote
Net sales improved 2% to $1,797.2 million and
surpassed the Zacks Consensus Estimate of $1,725 million.
At the company’s beer business, sales improved 9.3% to $1,090.1
million, driven by 8% rise in shipment volume and depletions growth
of 8.1%. Solid portfolio depletions and market share gains mainly
stemmed from continued strength in Modelo and Corona brand
families. During the holiday season, the company’s beer business
was the most significant growth contributor to the U.S. beer
market, courtesy of gains at Modelo Especial, Corona Premier and
Corona Familiar.
In fiscal 2019, the Modelo family surpassed the 125 million case
milestone, with the Corona family of brands achieving the 150
million case landmark. This led to depletion growth of 7% and 12%,
respectively, for the Corona and Modelo brand families during the
fiscal year.
However, the wine and spirits segment’s sales declined 7.6% to
$707.1 million in the fiscal fourth quarter, owing to 9% fall in
shipment volume and 4% decline in depletions.
Margins
Adjusted gross profit improved 4% year over year to $898.1 million.
Moreover, adjusted gross profit margin expanded 90 basis points
(bps) to 50%.
Constellation Brands' comparable operating income grew 5% to $570.8
million while comparable operating margin expanded 190 bps to
32.6%. The increase was due to improved operating margins at both
segments.
Operating margin at the beer segment increased 250 bps to 40.5%,
owing to gains from higher pricing and lower marketing expenses,
which were partly compensated by higher transportation costs.
Marketing expenses, as a percentage of sales, were 6.4% compared
with 8% in the prior-year quarter.
Moreover, the wine and spirits segment recorded operating margin
expansion of 60 bps to 27.7% due to SG&A leverage and favorable
price, somewhat mitigated by increased cost of goods sold
(COGS).
Financial Position
Constellation Brands ended fiscal 2019 with cash and cash
equivalents of $93.6 million. As of Feb 28, 2019, it had $11,759.8
million in long-term debt (excluding current maturities) along with
total shareholders’ equity of $12,837.2 million.
In fiscal 2019, Constellation Brands generated operating cash flow
of $2,246.3 million and free cash flow of $1,360 million. This
enabled the company to return more than $1 billion to shareholders
in forms of share repurchases and dividends. Notably, it
repurchased 2.4 million shares for $504 million in fiscal
2019.
Backed by the ability to generate solid cash flows and core
business strength, the company plans to return $4.5 billion to
shareholders in forms of share repurchases and dividends over the
next three fiscal years (or by fiscal 2022).
On Apr 3, 2019, the company announced a quarterly dividend of 75
cents per share for Class A and 68 cents for Class B stock,
representing an increase of 1% each from the prior dividend rates.
This dividend is payable on May 24 to shareholders of record as of
May 10.
Other Developments
On Apr 3, 2019, Constellation Brands revealed that it agreed to
sell nearly 30 brands from its wine & spirits portfolio, which
are priced at or below $11 per bottle, to E. & J. Gallo Winery.
The deal also includes the divestiture of related facilities in
California, New York and Washington.
Constellation Brands is likely to receive about
$1.7 billion for these low-end wine and spirit brands as well as
related assets. The sale is expected to conclude by the end of
first-quarter fiscal 2020, after satisfaction of regulatory and
other customary conditions.
With the sale of these low-end brands, the company expects to
concentrate on the more lucrative premium brands in the wine and
spirits portfolio, which should enhance returns and shareholder
value.
After the sale, Constellation Brands’ wine and spirits portfolio
will include leading brands like the iconic Robert Mondavi brand
family; The Prisoner Wine Company brand family; Kim Crawford — the
#1 sauvignon blanc in the U.S. market; Ruffino — leading brand
family of Italian wines; Meiomi — the #1 pinot noir in the United
States; and SVEDKA Vodka — the #1 imported vodka in the United
States. Further, the company will continue to showcase high-rated
and high-end brands like SIMI, Schrader Cellars and Mount Veeder
Winery wine brands, and High West Whiskey and Casa Noble Tequila.
Its portfolio will also include new premium wine innovations such
as Cooper & Thief and Spoken Barrel.
Fiscal 2020 Outlook
Following the strong end to fiscal 2019, the company issued
guidance for fiscal 2020. To account for the adjustments related to
Canopy Growth deal-related losses and other activities, it provided
earnings per share projections on a GAAP basis and comparable
(excluding Canopy) basis.
For fiscal 2020, the company envisions comparable earnings per
share (EPS) of $8.50-$8.80 compared with comparable EPS of $9.28
and $9.34 (excluding Canopy) in fiscal 2019. This guidance includes
the impact of wine and spirits divestitures but excludes impacts of
Canopy Growth equity earnings, share repurchases and gain or loss
on the wine and spirits transaction. On a reported basis, EPS for
the fiscal year is anticipated to be $8.47-$8.77 versus $17.57
reported in fiscal 2019.
Constellation Brands anticipates net sales and operating income for
the beer segment to increase 7-9% in fiscal 2020. Meanwhile, net
sales for the wine and spirits business are estimated to decline
25-30%, with operating income likely to fall 30-35%.
The guidance for the wine and spirits business includes estimated
impacts from the sale of its brands to Gallo. The company expects
to use proceeds from the transaction to reduce debt. Further, it
expects the transaction to have a favorable impact of nearly $40
million on interest expenses in fiscal 2020.
Despite these, the company projects organic net sales for the wine
and spirits business to increase in the low to mid-single digit in
fiscal 2020, with organic operating income growth of a high-single
digit.
Certain other factors were taken into consideration in providing
the earnings guidance. These include an interest expense
expectation of $420-$430 million, including incremental interest of
$105 million related to the financing of the 2018 Canopy
investment. Further, the company expects tax rate of 17% and
weighted average diluted shares outstanding of approximately 195
million.
Constellation Brands anticipates capital expenditure for fiscal
2020 to be $800-$900 million, with roughly $600 million estimated
to be incurred for the expansion of Mexico beer operations.
The company’s free cash flow expectation for fiscal 2020 lies
around $1.1-$1.2 billion. Operating cash flow is projected to be
$1.9-$2.1 billion.
Better-Ranked Stocks in the Alcohol Space
Carlsberg AS CABGY has a long term earnings growth rate of 5%. The
company currently sports a Zacks Rank #1 (Strong Buy). You can see
the complete list of today’s Zacks #1 Rank stocks
here.
Heineken NV HEINY has an impressive long-term earnings growth rate
of 5.9% and a Zacks Rank #2 (Buy).
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