Constellation Brands (STZ) Q4 Earnings & Sales Beat Estimates

Constellation Brands Inc. (NYSE: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 (NYSE: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.

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 (CO:CARLa) AS (OTC: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 (OTC:HEINY) has an impressive long-term earnings growth rate of 5.9% and a Zacks Rank #2 (Buy).

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