Constellation Brands recently reported an earnings beat driven by the strength of its beer business. The company’s comparable net sales for the quarter ended May 31 increased by 6% year over year, reaching $2.662 billion. Adjusted earnings-per-share (EPS) also saw a 17% increase compared to the same period last year, coming in at $3.57. This beat analysts’ predictions of $3.46 per share.
Despite the positive performance in the beer segment, shares of Constellation Brands fell 4% following the earnings report. Investors, including the author, are particularly troubled by the ongoing weakness in the wines and spirits business. Net sales for this division dropped by 7% to $389 million, falling below Street estimates. Operating income also declined by 25%, and operating margin decreased by 370 basis points to 15.3%.
The wine and spirits business faced challenges due to lower volumes and higher costs of goods sold. Shipment volumes declined by 5.1%, with depletions down by 12.7% compared to the previous year. The company acknowledged market difficulties, especially in the U.S. wholesale channel. However, Constellation Brands expressed optimism about improvements in select offerings within this segment as operational and commercial execution initiatives take hold.
On the other hand, the beer segment continued to show positive results. Despite sales coming in slightly below estimates, the segment achieved 8% year-over-year growth. Operating income outperformed, leading to operating margin expansion. Shipments increased by 7.6% compared to the previous year, with depletions up by 6.4%. Key brands like Modelo Especial, Pacifico, and Modelo Chelada demonstrated significant growth.
Management reaffirmed its guidance for the upcoming period. Net sales are expected to increase by 6% to 7%, primarily driven by growth in the beer segment. Enterprise operating income is projected to rise by 10% to 12%, with beer showing significant growth while wine and spirits are expected to decline. Comparable earnings are estimated to be between $13.50 and $13.80 per share.
Despite the strong performance of the beer business, investors remain concerned about the challenges faced by Constellation Brands’ wines and spirits division. While the company is taking steps to address these issues, there is still uncertainty surrounding the segment’s future performance. Management’s focus on operational improvements and market execution will be crucial in determining the company’s overall success in the coming quarters.
While Constellation Brands has a solid beer business, the weakness in the wines and spirits segment continues to be a cause for concern. The company’s ability to address operational challenges and drive growth in all segments will be essential for maintaining investor confidence and achieving long-term success in the beverage industry.