Why Is Constellation Brands (STZ) Down 10.5% Since Last Earnings Report?

Zacks Equity Research
·5-min read

A month has gone by since the last earnings report for Constellation Brands (STZ). Shares have lost about 10.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Constellation Brands due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Constellation Brands Beats on Q2 Earnings & Sales

Constellation Brands reported second-quarter fiscal 2021 results, wherein the top and the bottom lines surpassed the Zacks Consensus Estimate. With this, the company has reported earnings beat for the 11th consecutive quarter. Despite the impacts of the coronavirus outbreak, results have been primarily aided by robust depletion growth at the company’s beer business.

Constellation Brands posted fiscal second-quarter comparable earnings of $2.76 per share, which increased 1% year over year and beat the Zacks Consensus Estimate of $2.51. The reported figure included Canopy Growth equity loss of 15 cents. Excluding the impacts of Canopy Growth, the company posted earnings of $2.91 per share, flat with the year-ago period.

Net sales declined 4% to $2,260.4 million but came above the Zacks Consensus Estimate of $2,192 million.

At the company’s beer business, sales were almost flat at $1,635.9 million as a 1.6% decline in shipment volume was offset by 4.7% depletion growth. Organic shipment volume dipped 0.9%. Organic sales for the business were down 1%. Depletion volume benefited from robust off-premise channel sales, which more than offset the 50% decline in the on-premise channel due to coronavirus.

Solid portfolio depletions and market-share gains mainly stemmed from continued strength in the Modelo and Corona Brand Families. Notably, depletions for the Modelo Especial increased more than 9%.

Sales at the wine and spirits segment declined 11% to $624.5 million in the fiscal second quarter. Further, organic net sales for the segment dropped 9%. While the segment witnessed a 19.4% decline in shipment volume and a 3.3% fall in depletions, organic shipment volume fell 16.5%.

Adjusted gross profit dipped 2% year over year to $1,187 million. However, the adjusted gross profit margin expanded 110 basis points (bps) to 52.5%.

Constellation Brands' comparable operating income rose 1% to $797.8 million, while comparable operating margin improved nearly 150 bps to 35.3%.

Further, the operating margin at the beer segment expanded 70 bps to 42.5%, owing to gains from lower marketing spend and favorable pricing, offset by higher cost of goods sold (“COGS”). Wine and spirits segment’s operating margin expanded 310 bps to 25.9% on mix benefits, favorable price and lower marketing expenses, partly offset by elevated COGS and SG&A as a rate of sales.

Financial Position

Constellation Brands ended fiscal second quarter with cash and cash equivalent of $204.6 million. As of Aug 31, 2020, it had $11,066.8 million in long-term debt (excluding current maturities) along with total shareholders’ equity (excluding non-controlling interest) of $11,688 million.

In the first six months of fiscal 2021, Constellation Brands generated operating cash flow of $1,444.9 million and adjusted free cash flow of $1,167.1 million.

On Sep 30, 2020, the company announced a quarterly dividend of 75 cents per share for Class A and 68 cents for Class B stock. The dividend is payable Nov 20 to its shareholders of record as of Nov 6.

Other Developments

During the reported quarter, Constellation Brands acquired the balance stake in Copper & Kings, thus expanding its premium-spirits portfolio. It also announced a minority stake in Booker Vineyard's super-luxury, which is a direct-to-consumer wine business. This strengthened the company's direct-to-consumer and 3-tier e-commerce channels.

Management notified that the further revised Wine and Spirits transaction to divest a portion of the business to E. & J. Gallo Winery (Gallo) is assumed to conclude by third-quarter end. Also, the agreement to divest the Nobilo Wine brand to Gallo is expected to close by said period. Furthermore, the company has agreed to sell the Paul Masson Grande Amber Brandy brand and the concentrate business in separate deals, which are also expected to conclude by third-quarter end. It plans to retain the Cooks and J. Roget labels, and the Mission Bell Winery.

Outlook

Driven by the potential impacts of the pandemic, the company is not able to provide guidance for fiscal 2021. However, management remains optimistic about its brands and resilience in the business, which is likely to help it deliver robust organic growth in fiscal 2021.

Although the shipment volumes and distributor-inventory levels were earlier hurt by the slowdown of beer production in Mexico due to the impacts of the COVID-19 outbreak, the product inventories are likely to revert to more normal levels by the end of the third quarter of fiscal 2021.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -5.27% due to these changes.

VGM Scores

Currently, Constellation Brands has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Constellation Brands has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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