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Is On-Premise Recovery Key to Molson Coors’ (TAP) Growth?

Zacks

Molson Coors Beverage Company TAP has been a strong contender in the alcoholic beverages industry, which is recognized for its premiumization initiatives and strong brand portfolio. Despite the current global turmoil related to the coronavirus pandemic, the company remains committed to growing its market share through innovation and premiumization. Nonetheless, its first-quarter 2020 performance reflected the impacts of the pandemic on its on-premise business.

In the first quarter, Molson Coors’ earnings beat the Zacks Consensus Estimate, while the top line missed the same. Moreover, the top and bottom lines declined year over year. Earnings and sales were mainly impacted by unfavorable mix as well as keg sales returns and reimbursements associated with the on-premise impacts of the pandemic across major markets. The impacts on-premise sales due to the aforementioned factors were $31.5 million on sales and costs of $50 million on earnings.

Lower financial volume and inflation were other deterrents. Molson Coors’ worldwide brand volume declined 1.8% and financial volume declined 8.3%. The decline in worldwide brand volume was mainly attributed to declines in Europe due to the impacts of the coronavirus outbreak. Notably, the company’s U.K. business has greater exposure to the on-premise channel, which caused more estimated impacts of on-premise keg sales returns due to the pandemic.

Meanwhile, financial volume was hurt by soft North America performance, owing to the unfavorable shipment timing in the United States, including brewery downtime related to the Milwaukee tragedy, market share declines and lower contract brewing volume. The Milwaukee tragedy materially impacted sales to wholesalers in late February and early March. Further, in North America, it witnessed an estimated on-premise keg sales returns and reimbursements of $19.0 million due to the coronavirus outbreak.

Consequently, shares of the Zacks Rank #3 (Hold) company have declined 9.2% in the past three months against the industry’s 9.7% growth.


Molson Coors expects the coronavirus pandemic to have significant impacts on its revenues and profit in the second quarter and 2020. Consequently, it withdrew its guidance for 2020. The impacts are expected to primarily relate to the closure of on-premise sales channels in almost all markets as well as other impacts of the pandemic on the global economy. In many instances, the company notes that on-premise sales have been reduced to zero. It notes that the pandemic continued to hurt the on-premise channel in April 2020 due to extended closures.

While the off-premise (retail stores) sales continue to perform well, this is not enough to fully offset the loss of the on-premise (bars, restaurants, etc.) volume. Further, the company notes that the benefits of pantry loading, which aided North America performance in March, have not continued in April. This is likely to weigh on its second-quarter performance.

Is there Hope?

While the near-term impacts of the coronavirus pandemic are clear, Molson Coors’ premiumization and cost-saving initiatives remain the basis for its balanced performance in the long term.

With a view to accelerate portfolio premiumization, the company has made significant additions to its above-premium brands’ portfolio in the past few years. Consequently, nearly 30% and 20% of its portfolio in Europe and Canada, respectively, is now in the above-premium brands. Further, the company is now focused on increasing investments in the above-premium category in the United States. The company’s innovation plans are focused on introducing new flavors and variations for its customers. It remains optimistic about the recently launched brands, including Vizzy Hard Seltzer, Blue Moon LightSky, Saint Archer Gold and Movo canned wine spritzers.

Additionally, the company has undertaken restructuring initiatives to reduce overhead costs and boost profitability. The initiatives included the closure of underperforming breweries, improving efficiencies in finance, administration and human resources, and reducing labor and general overhead costs. It has also been focusing on initiatives to improve its supply-chain network and build on efficiencies across the business to generate additional resources to invest in brand building and innovation.

In 2020, the company remains committed to delivering more cost savings under its next-generation cost-saving program. It expects the current program to generate cost savings of $600 million over the three years ending 2022. These cost savings include $150 million related to the revitalization plan. Further, it expects to incur one-time costs of $120-$180 million for generating savings from the revitalization plan.

Conclusion

The efforts place it well for recovery in the long term despite the near-term losses in the on-premise channel. Further, like its peers, the company is focused on boosting its off-premise sales through more retail tie-ups and expansion into e-commerce. In all likelihood, Molson Coors’ long-term earnings growth rate of 6% and a Value Score of B are indicative of recovery in the long term.

3 Better-Ranked Beverage Stocks

The Boston Beer Company, Inc. SAM has delivered a positive earnings surprise of 4.7%, on average, in the trailing four quarters. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Craft Brew Alliance, Inc. BREW, with a Zacks Rank #1 at present, delivered a positive earnings surprise of 150% in the last reported quarter.

Reeds, Inc. REED, with a long-term earnings growth rate of 20%, currently sports a Zacks Rank #1.

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