Constellation Brands recently reported an earnings beat that was primarily fueled by the strength of its beer business. However, the company’s shares took a hit, falling 4% despite an initial upward movement. This disappointing performance can be attributed to ongoing concerns over the weakness in Constellation’s wines and spirits segment.
Comparable net sales for the three-month period ending on May 31 showed a 6% year-over-year increase, totaling $2.662 billion. Although this figure missed Wall Street’s expectations by a small margin, Constellation Brands still managed to achieve an adjusted earnings-per-share (EPS) of $3.57, which represented a 17% increase compared to the same quarter last year. This beat analyst predictions of $3.46 per share.
Constellation Brands is favored for its robust beer franchise, which includes popular Mexican brands like Modelo, Corona, and Pacifico. However, there is a growing sentiment among investors that the company should consider divesting its wine and spirits business to focus more on the lucrative beer segment. The beer business has shown promising growth, outperforming the overall consumer packaged goods industry by a significant margin.
The wine and spirits division of Constellation Brands continues to struggle, with net sales declining by 7% to $389 million. Operating income for this segment also took a hit, dropping by 25% to approximately $60 million. The decline in operating margin was primarily attributed to lower volumes and higher costs of goods sold, offsetting lower operating expenses in other areas. Shipment volumes decreased by 5.1%, reflecting challenging market conditions, particularly in the U.S. wholesale channel.
In contrast to the wine and spirits division, Constellation’s beer segment demonstrated positive results. Despite slightly missing sales estimates, the segment saw an 8% year-over-year growth. The profitability of the beer business led to an operating income beat, with operating margin expansion driven by greater operating leverage and cost-saving initiatives. Shipments increased by 7.6% year over year, with strong growth in key brands like Modelo Especial, Pacifico, and Modelo Chelada.
Management reaffirmed its guidance for the upcoming quarters, expecting a 6% to 7% increase in net sales, primarily driven by beer sales growth. On the other hand, wine and spirits sales are projected to decline slightly. Operating income is expected to increase by 10% to 12%, with beer accounting for most of the growth and wine and spirits experiencing a decline. Comparable earnings are forecasted to be in the range of $13.50 to $13.80 per share.
Despite the strong performance of Constellation Brands’ beer business, the company continues to face challenges in its wine and spirits segment. Investors are concerned about the persistent weakness in this area and are urging the company to focus more on its profitable beer franchise. Management’s efforts to address these issues and improve the overall performance of the company will be critical in determining its future success in the market.