Constellation Brands, the producer of Modelo and Corona beers, reported higher third-quarter profit on Thursday, driven by strong beer sales even as its wine and spirits division continued to struggle.
Beer Sales Outperform, Offset Weakness Elsewhere
The Victor, New York-based company earned $2.00 per share in the quarter, beating analysts’ estimates of $1.87 per share. Net sales rose 8% to $2.44 billion, shy of expectations of $2.47 billion.1
Constellation’s beer business was once again the star performer, with sales jumping 14% on an organic basis to $1.74 billion. Shipments of its Modelo and Pacifico brands climbed nearly 12%, while depletions jumped 8.2%.2
Meanwhile, sales of wine and spirits fell 7% on an organic basis to $689 million amid weak consumer demand. The company lowered its full-year outlook for the division, now expecting a decline of between 11% and 13%.3
|Q3 Organic Sales Growth
Modelo Remains Growth Driver
Modelo continued to drive Constellation’s growth, with depletions soaring over 17% in the quarter. The brand has benefited from strong consumer demand and its position as the “#1 Beer in Growth” in the high-end segment.4
Meanwhile, Pacifico depletions were up mid-single digits. Constellation’s craft beer division saw high-single digit depletion growth on the continued strength of Ballast Point.
The company’s beer momentum is expected to continue thanks to major marketing and innovations planned for 2024. These include a national Corona Refresca campaign, new Modelo advertising, and product launches under the Pacifico and Ballast Point brands.5
Outlook Improves on Beer Strength
Given its strong quarterly performance and positive beer sales trends, Constellation raised its full-year comparable earnings per share guidance to a range of $11.00-$11.20 from $10.85-$11.15 previously.6
Comparable basis excludes Canopy Growth equity losses that impacted previous guidance. The company expects to generate $1.8-$2 billion in free cash flow in fiscal 2024, some of which could be used to buy back shares.
Constellation’s growth is being powered by the continued beer momentum, especially in the high-end, Mexican import segment where Modelo holds the top spot. This should support earnings growth even if the wine/spirits business lags.
The company does face some near-term headwinds from cost inflation and supply chain constraints, but its pricing power and premium portfolio should help it navigate through them.
All in all, Constellation remains an attractive long-term investment story centered around its strong Mexican beer brands.
With clearly diverging trends in its beer and wine/spirits units, Constellation finds itself at a bit of a crossroads. It boasts an incredibly strong and valuable beer franchise centered around Modelo and Corona that continues gaining share.
However, its efforts to build out a portfolio of higher-end wines and craft spirits has floundered. Constellation likely needs to take a hard look at that business and pare back underperforming parts of the portfolio.
Despite some questions around its wine/spirits strategy, Constellation’s overall growth prospects remain solid thanks to its dominant positioning in Mexican imports. Its beer business is poised to continue taking share given strong consumer tailwinds and savvy marketing.
If Constellation can return its other business to growth while maintaining the current beer momentum, its outlook brightens considerably from here. But in the near-term, it remains heavily dependent on Modelo and Corona to drive its success.
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