Factors Likely to Shape Constellation Brands (STZ) Q4 Earnings

Constellation Brands, Inc. STZ is scheduled to release fourth-quarter fiscal 2019 results on Apr 4. Notably, this leading wine company delivered a positive earnings surprise of 16.2% in the last reported quarter. Furthermore, it posted an average trailing four-quarter beat of 6.9%, wherein the company recorded earnings surprise in three quarters.

The Zacks Consensus Estimate for earnings of $1.72 per share for the fiscal fourth quarter moved south by a penny over the past seven days. This reflects a year-over-year decline of 9.5% from the prior-year quarter. For revenues, the consensus mark is pegged at $1.73 billion for the to-be-reported quarter, mirroring a 2.3% decline year over year.

Constellation Brands Inc Price and EPS Surprise

Constellation Brands Inc Price and EPS Surprise | Constellation Brands Inc Quote

Factors at Play

Constellation Brands has been displaying strength, which is quite evident from its consistent earnings record and strong beer business. The company is also poised to gain from exposure in the cannabis space with its investment in Canopy Growth CGC. Furthermore, its constant brand-building efforts, acquisitions and e-commerce initiatives are commendable.

Strength in Constellation Brands’ beer business has been a key growth driver for the past many years. Despite the softness in the U.S. beer market, the company’s beer business sales improved 16% in third-quarter fiscal 2019. In fact, this beer business was the most significant contributor in retail in the high-end U.S. beer market during the fiscal third quarter, courtesy of gains from the Corona and Modelo Especial’s brands. These brands were aided by superb distribution gains and strong innovations. The company’s beer business continues to outperform the U.S. beer market by a wide double-digit margin. For fiscal 2019, Constellation Brands anticipates net sales at the beer segment to be at the high-end of the previously expected 9-11% growth.

Additionally, Constellation Brands’ consistent focus on brand building and initiatives to include new products has been aiding top-line growth. Owing to its strategic endeavors, the company is witnessing increasing market share, especially in the U.S. beer category. Moreover, it is bringing innovations and improving its operational activities. It is focused on enhancing points of distribution at retail and effectively executing its merchandising initiatives to boost sales.

These apart, Constellation Brands’ investments in digital enablement for e-commerce initiatives and the new ERP platform as part of the ‘Fit for Growth’ initiative bode well.

However, the company slashed its adjusted and GAAP earnings outlook for fiscal 2019 due to expectations of higher interest expense and softness in wine and spirits business in the fiscal fourth quarter.

In November 2018, Constellation Brands completed a $4 billion investment in Canopy Growth, which was financed using debt. Consequently, the company is likely to incur additional interest expense of nearly $55 million, which should reduce earnings per share by nearly 25 cents in fiscal 2019. Overall, the company estimates interest expense of $380-$390 million for fiscal 2019 compared with $335-$345 million guided earlier.

Further, sales and operating income for the wine and spirits business is estimated to decline low-single digits in fiscal 2019 compared with the prior expectation of 2-4% growth. The company now envisions adjusted earnings per share of $9.20-$9.30 for the fiscal year, down from $9.60-$9.75 projected earlier. On a reported basis, EPS for the fiscal year is now anticipated to be $12.95-$13.05, down from $14.10-$14.25 anticipated earlier.

Moreover, higher transportation, operating and marketing expenses dented the operating margin at the beer segment in the fiscal third quarter, which is likely to continue in fiscal 2019.

In a month’s time, Constellation Brands has lost 1.1% against the industry’s 1.7% growth, reflecting negative sentiment surrounding the stock ahead of the earnings release.