Taking a closer look at its results, EPS came in at $2.00, which was good for an $0.11 beat. The company also generated strong operating cash flow and free cash flow of $1.5 billion and $763 million, respectively. The healthy cash generation enables the company to aggressively buyback its stock. STZ also announced a quarterly dividend of $0.52/share, making it a very shareholder friendly stock in terms of shareholder yield.
The not-so-rosy news is that revenue fell 1% to $1.8 billion, slightly missing the $1.87 billion consensus. That was only its second topline miss over the past twelve quarters. Also, it was its first annual decline in revenue it at least five years. The primary issue here is that its wine and spirits sales fell 10.3% as depletions (shipments to retailers) declined by 2.5%. Furthermore, management stated that it now expects sales for this segment to come in at the lower end of its forecasts at 4.6% growth for the full year.
On the positive side, the beer segment climbed by 8% with a 9% boost in depletions, thanks to strong Labor Day and Thanksgiving holiday sales. From a product standpoint, Modelo was a clear outperformer with depletion growth of nearly 17%. Also, operating margin in its beer business improved by 290 basis points to 37.7%, driven by solid operating performance and favorable pricing.
STZ's outlook is still strong as it raised its FY18 EPS guidance to $8.40-$8.50 from $8.25-$8.44. above the $8.44 Capital IQ Consensus. The company is anticipating continued strong performance from the beer segment, targeting net sales growth in the range of 9-11%. Additionally, STZ is forecasting FY18 operating cash flow of $1.9-$2.1 billion and free cash flow of $725-$825 million.
To conclude, STZ's Q3 report was a step backwards from its typical quarterly results and its declining revenue growth (now negative) may be eroding some confidence among investors as the wine and spirits business sputters. However, the results were hardly a "train wreck" as it is still generating impressive earnings, operating income, and cash flow. And, STZ continues to buy back stock while paying investors a solid dividend, which should be supportive to the stock price once this initial knee-jerk reaction lower eases.