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Constellation Brands (STZ) Q3 Earnings Beat, Ups FY18 View

Zacks

Constellation Brands Inc. STZ delivered robust third-quarter fiscal 2018 results, wherein both the top and bottom line topped estimates and improved year over year. Notably, this marked the 13th consecutive quarter of earnings beat for the company. Further, to inspire investors’ confidence management raised earnings guidance for fiscal 2018.

However, shares of Constellation Brands declined nearly 2% in the pre-market trading session primarily due to lower-than-expected sales performance. Overall, this Zacks Rank #2 (Buy) stock surged 51.1% in the past year, outperforming the industry’s 23.4% growth.



During the quarter, Constellation Brands benefited from efforts to drive consumer demand for its robust brand portfolio. Further, results were driven by contributions from acquisitions along with continued strength in the company’s beer business in particular.

Q3 Highlights

The company’s adjusted earnings for third-quarter fiscal 2018 rose 2% year over year to $2.00 per share, surpassing the Zacks Consensus Estimate of $1.87. Reported earnings came in at $2.44 per share, up 23% 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 dipped 0.6% to $1,799.1 million and lagged the Zacks Consensus Estimate of $1,863 million. However, organic sales grew 5%.

Sales at the company’s beer business improved 7.8%, driven by 5.9% rise in shipment volumes and depletions growth of 9.1%. The beer business also gained from strong portfolio performance and share gains for the Modelo brand family, with depletions growth of 17%. Further, beer sales benefited from market share gains in United States during the Labor Day and Thanksgiving holidays. During the quarter, the U.S. shipment volume lagged depletion volumes, mainly due to the timing.

Wine and spirits’ sales fell 10.3%, due to lower shipment volumes and 2.5% decline in depletions. Organic sales for the segment rose 0.3%. Notably, the company’s recently acquired wine brands — The Prisoner, Meiomi, and Charles Smith wine brands, reported superb depletions growth of 21%, 14% and 89%, respectively. Moreover, the High West Whiskey portfolio delivered depletions growth of 28%.

Cost and Margin Performance

Adjusted gross profit for the quarter improved 3% year over year to $911.3 million. Adjusted gross profit margin expanded 190 basis points (bps) to 50.7%.

Constellation Brands' comparable operating income grew nearly 3% to $550.1 million with the comparable operating margin expanding 120 bps to 30.6%. This growth was backed by operating income improvement at the beer segment, offset by operating income decline at the wine and spirits business. The beer segment gained from solid operating performance and favorable pricing. Meanwhile, operating income at the wine and spirits business was hurt by increased spending on marketing initiatives and higher cost of goods sold.

Financial Position

Constellation Brands ended the quarter with cash and cash equivalents of $154.5 million. As of Nov 30, 2017, the company had $8,114.2 million in long-term debt (excluding current maturities) and total shareholders’ equity was $8,009.1 million.

In first-half fiscal 2018, Constellation Brands generated $1,468.4 million in cash from operations and free cash flow of $762.8 million.

The company’s solid cash flows and financials provide it with the flexibility to pay dividends. Incidentally, on Jan 4, 2018, the company announced quarterly dividend of 52 cents per share for Class A and 47 cents for Class B shares. This dividend is payable on Feb 23, to shareholders on record as of Feb 9.

Further, it repurchased 1.1 million shares for $225 million in the quarter. Additionally, the company authorized a new multi-year $3 billion share repurchase program. It has $308 million remaining under its existing buyback plan.

Fiscal 2018 Outlook

Management remains encouraged with superb results, which was marked by significant market share gains, margin expansion, strong free cash flow and solid execution. This along with the strength in the beer business led the company to raise earnings outlook for fiscal 2018. Further, management raised fiscal 2018 operating income target for the beer segment, while retaining the sales forecast. For the wine and spirits business, it now anticipates results to be at the lower end of the sales and operating income guidance ranges.

The company now envisions adjusted earnings guidance in a range of $8.40-$8.50 per share, compared with previous guidance range of $8.25-$8.40. On a reported basis, EPS for fiscal 2018 is anticipated in the range of $8.50-$8.60, up from $7.90-$8.05 projected earlier.

It expects net sales for the beer segment to grow 9-11%. Operating income at this segment is envisioned to increase in a band of 18-19%, compared with the prior guidance of 17-19%.

Sales at the wine and spirits’ segment are still projected to decline 4-6%, while the operating income is expected to remain flat. These projections include the impact from the sale of its Canadian wine business, and benefits from the High West, Charles Smith and Prisoner buyouts. Excluding the effects of these, net sales for the wine and spirits business are expected to increase in the range of the 4-6%, while operating income is anticipated to improve 5-7% in fiscal 2018. Further, the company now expects results for the wine spirits business to be at the lower end of the above guidance ranges.

Certain other factors were taken into consideration in providing the earnings guidance. These include an interest expense expectation of $330-$340 million, an approximate tax rate of 20% and weighted average diluted shares outstanding of approximately 201 million.

The company anticipates capital expenditure for fiscal 2018 in the range of $1.175-$1.275 billion with roughly $1.0 billion estimated for expansion of Mexico beer operations.

The company’s free cash flow expectation for fiscal 2018 lies in the range of $725-$825 million. Operating cash flow is projected in the range of $1.9-$2.1 billion.

Looking for Some More Promising Stocks? Check these

Some other top-ranked stocks in the same industry include Brown-Forman Corp. BF.B, Diageo Plc DEO and Molson Coors Brewing Company TAP. While Brown-Forman sports a Zacks Rank #1 (Strong Buy), Diageo and Molson Coors carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Brown-Forman has improved 24.9% in the last three months. Moreover, the company has delivered an average positive earnings surprise of nearly 7% in the trailing four quarters while estimates for the current fiscal have improved in the last 30 days.

Diageo has Growth Score of B. Additionally, the stock has advanced 8.9% in the last three months.

Molson Coors’ estimates for the current fiscal have improved in the last 30 days. Further, the stock has a VGM Score of B.

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