Constellation Brands: Making the Best of a Bad Environment

The Covid-19 pandemic has required the shutting down of nearly all restaurants and bars throughout the U.S. and the rest of the world in some capacity over the past few months. The companies that supply these businesses have suffered along with them.

One company that appears to be withstanding the difficulties, however, is Constellation Brands Inc (NYSE:STZ).

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="I last covered the company in early April and thought the stock was a buy at the then price of $166. Shares are up nearly 13% since then. Let’s review quarterly results to see if the stock can still be bought at the current price.” data-reactid=”14″>I last covered the company in early April and thought the stock was a buy at the then price of $166. Shares are up nearly 13% since then. Let’s review quarterly results to see if the stock can still be bought at the current price.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Quarterly results” data-reactid=”21″>Quarterly results

Constellation Brands reported first-quarter 2021 results on July 1. Revenue declined 6.7% to $2 billion, which was $7 million below what the analyst community had expected. Adjusted earnings per share grew 4.1% to $2.30, topping estimates by 26 cents.

At first glance, Constellation Brands’ first quarter was pretty solid considering the shuttering of so many restaurants and bars. These businesses are a prime channel for the company to see its beer, wine and spirits sales grow. A mid-single-digit revenue decline isn’t that terrible and nearly in line with what Wall Street had anticipated. Adjusted earnings growth was also a pleasant surprise and the beat showed that analysts believed Constellation Brands would fail to deliver on the bottom line.

To be sure, there were weak points in the quarter. Beer shipment volumes declined 7.2% and 6.3% organically. Net sales for beer, which accounted for nearly 71% of total sales, were down 6%. However, depletion volume, which is the rate at which beer already shipped from a producer to a distributor is purchased by customers, was higher by 5.6%. Depletion growth rises to 7% when adjusting for one less selling day in the quarter.

This growth was largely due to strength in the off-premise channel. Consumers weren’t able to visit their favorite establishment for a beer, but they could buy from local distributors. This trend of off-premise consumption was a common theme for the industry. According to Nielsen data, alcohol beverage sales were up 26% for the past 16 weeks. By beverage type, spirits were higher by nearly 35%, wine grew 29% and beer was up more than 21%. Total off-premise beer revenues are up 16% for the first half of 2020.

Within Constellation Brands’ beer segment, the Corona Brand Family continues to perform quite well as this product line had double-digit growth. Corona Extra continues to see higher demand, as do the Corona Premier and Corona Refresca products.

Corona Hard Seltzer, which was launched this past spring, is already the fourth best-selling hard seltzer and is on pace to sell more than 10 million cases this year, according to CEO Bill Newlands. Hard seltzer has quickly become a big business as this category had week-over-week growth of more than 200% in June and now has market share of 10% as of the end of the first half of the year. Constellation Brands’ ability to capitalize on this market shows how quickly the company can introduce a new product and quickly become a leader.

Modelo Especial was also singled out for performance as this product had a depletion rate of 12%.

Constellation Brands’ beer segment did see disruptions in production due to Covid-19 as Mexican factories were closed for some time. The company stated that production levels in the country had returned to normal levels in June.

Wine and spirts volumes were down 12.9%, with organic shipments falling more than 9%. Depletion volumes were lower by 1.1%. On the other hand, what the company calls its “Power Brands” had gains across several different price points. Depletion volumes for these brands, which include Kim Crawford, Svedka and Meiomi, increased 5%. Growth for this segment as a whole was underwhelming, but the company’s leading brands more than held their own.

Constellation Brands did announce an acquisition and several divestitures in the wine and spirits business. First, the company is purchasing Empathy Wines, an e-commerce company that markets high-end wines direct to consumers. The company is also divesting several brands, including Nobilo Wine and Paul Masson Grande Brandy brand and concentrate business in separate transactions.

Constellation Brands also discussed its investment in Canopy Growth Corp. (NYSE:CGC). The company recognized a $197 million decrease in the fair value of its investment for the first quarter of fiscal 2021. Since its initial investment in the company in 2017, Constellation Brands has seen a $122 million unrealized gain in reported basis results. While the investment has been a headwind at times, Constellation Brands believes it will pay off. For example, Canopy Growth’s zero-calorie cannabis-based beverage line is expected to be a top-selling product.