Investors Fret That Constellation Brands' Beer Sales Aren't Growing Double-Digits Anymore

There is continuing pressure on beer sales following the company's price hike last year in order to combat inflationary pressures in its supply chain, which has led to nothing but flat stock prices for Corona Beer, the company that owns Corona Beer. Constellation Brands Inc. missed revenue estimates for its fiscal fourth quarter Thursday.

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According to analysts, this has resulted in some consumers reducing their consumption or switching to cheaper beer brands altogether, a trend that has been identified by some consumers this year.

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It was reported in the company's STZ, which is 1.18% beer depletions, which is a metric used by distributors and retailers to measure the number of cases that are sold, that 6.3% increase over the third quarter, a better result than the 5.7% growth recorded in the third quarter, but it was still below the four-quarter growth of 8% to 9%.

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A 2% decline in beer sales was recorded, while a 14% decrease in wine and spirits sales was recorded.

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Bill Chappell, an analyst with Truist, noted that despite the weather headwinds in February, the depletion trends at CAGNY were in line with those offered by Constellation Brands at the consumer conference last week.

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It is evident that Chappell is concerned that the days of growing beer topline by double digits are behind them, as raw material costs, packaging, logistics, and labor costs continue to put pressure on beer operating margins. He wrote in a note to clients, "We worry that the days of double-digit growth are behind us (guideline for +7-9% beer sales).

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The Truist Investments company has given a hold rating to the stock and said it expects investors to digest the earnings report on Thursday with a muted performance.

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“CAGNY indicated that it expected its beer margin to be just slightly below the algorithm's medium-term expectation of 39-40%, while the midpoint of the guide indicates that they would achieve an average revenue of 38%," said Glazer.

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On Constellation's last quarterly earnings call, questions regarding the beer category dominated the discussion, and the topic remained prominent on Thursday's call as well. It was also important for analysts to receive an update on the sales of the company in California, as the state has experienced severe weather during the recent winter, which is rare for the Golden State.

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In a FactSet transcript, Newlands said that California was certainly challenged this first quarter.

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“However, once we get into May, June, July, and August in California, it is extremely rare to receive rain, snow, or flooding as we progress through the year. We expect that when a particular market is dislocated, it will pass over time, just as we have seen so many other times."

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Adjusted per-share earnings came to $1.98, beating the $1.83 FactSet consensus estimate. Net income fell to $223 million, or $1.21 per share, from $395 million, or $2.07 per share, in the prior year.

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EPS came to $2.15 when Exclusions are made for the loss of Canopy Growth Corp. CGC, 0.63% WEED, 0.47%.

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There was a 5% decline in revenue to $1.998 billion, below the $2.016 billion FactSet consensus estimate.

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A combination of favorable mix and grape cost optimization measures led to favorable beer sales and increased operating margins in the wine and spirits business, according to Newlands and CFO Garth Hankinson.

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As for the stock, CFRA analyst Garrett Nelson remains neutral, saying STZ will spend $4.0 billion to $4.5 billion on beer capacity additions between fiscal 2024 and fiscal 2026, which could negatively impact free cash flow.

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It is anticipated that the company's free cash flow will drop from $1.72 billion at the end of fiscal 2023 to $1.2 billion at the beginning of fiscal 2024.

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Nava and Obregon sites may be expanded, optimized, and/or constructed as part of the expansion in Southeast Mexico in the state of Veracruz.

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According to Roth MKM analyst Bill Kirk, who has also rated the stock neutral, investors should pay closer attention to Modelo for the upcoming quarter compared with a few earnings growth opportunities in FY24. “The beer performance is expected to remain muted in 1Q and there is little growth opportunity in FY24.” We believe it is more prudent to monitor Modelo than to invest in it and own it.”

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According to FactSet, Constellation Brands expects fiscal 2024 adjusted EPS of $11.70 to $12.00, whereas Constellation Brands expects $11.68.

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In addition to that, the company has announced that it will raise the quarterly cash dividend by 11% to 89 cents per share. As of the 4th of May, shareholders who hold shares of record with the company will receive the new dividend on May 18.

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Stocks of the S&P 500 SPX, 0.39% have fallen 9% over the past 12 months, compared with stock prices of the stock.

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