Trading to near two-year lows shares of Modelo and Corona owner Constellation
Brands (STZ 155.55, -16.79) sit nearly 9.7% lower. Impetus behind the
fiscal 2019 guidance cut was underperformance in wine and spirits as well
as the company’s recent investment in Canopy Growth (CGC
32.49, +2.85, +9.6%).
Constellation announced Q3 comparable earnings per share (EPS) of $2.37, impacted in part by the company’s recent $4 bln Canopy Growth investment closed on November 1, 2018. The company estimates the interest expense associated with this transaction to approximate $55 mln before tax with an approximate $0.25 impact on fiscal 2019 EPS results.
STZ also experienced higher glass cost in the quarter due to a nonrecurring raw material supply issue that impacted glass production at the company’s Nava glass plant. Management highlighted that this supply issue has been rectified. STZ also continues to expect some transportation cost headwinds as we move into fiscal 2020 as drivers in freight lanes are expected to remain in short supply. The company also expects fiscal 2019 marketing as a percent of net sales to be at the low end of its targeted range of 9.5-10%, comparing to last year's 9% result.
Additionally, Constellation highlighted the company has recognized $1.2 bln unrealized gain in reported basis results since initial Canopy Growth investment in November 2017; however, Constellation saw a $164 mln decline in the fair value of the Canopy investments for Q3.
The company continues to evaluate the potential equity and earnings impact to fiscal 2019 in fiscal '20 results from the Canopy investment including any comparable to any potential comparable adjustments related to the transaction.
Net sales for Q3 came in at $1.97 bln, or up about 9.5% compared to last year, highlighted by 16.0% growth in beer to about $1.21 bln. Constellation noted the Modelo and Corona brand families drove depletion growth of 8%, with the Constellation beer business achieving the most significant share gains in the U.S. beer industry for the third quarter. Strong beer shipment volume was primarily timing related as fiscal year-to-date shipment and depletion volume are closely aligned. The beer business now expects fiscal 2019 net sales growth to be at the high end of the 9-11% range and operating margin to approximate 39%.
Wine and spirits didn’t fare as well, though still managed to see modest 0.4% net sales growth in the quarter to about $762.8 mln. Management noted that focus on higher retail price points for the wine business was paying off. In the last 52 weeks, Constellation outperformed the U.S. wine market at the greater than $11 price point with several of its Focus Brands growing double digits in IRI channels during this time-frame, including Kim Crawford, The Prisoner and Meiomi. Depletion performance for the below $11 price point continues to be challenged, resulting in an overall fiscal year-to-date depletion decline of 2% while overall U.S. domestic depletion volume came in at a 3.2% decline. The wine and spirits business now expects net sales and operating income to decline low-single digits for fiscal 2019.
The underperformance in wine and spirits, and in part the fair value decline in the Canopy investment, causes Constellation to lower its fiscal 2019 comparable EPS outlook to $9.20-9.30 from the prior $9.60-9.75. Management also now expects FY19 interest expense between $380-390 mln, up from $335-345 mln. Excluding the impact of the incremental Canopy-related interest expense, comparable basis diluted EPS for STZ’s core business will grow almost 10% for fiscal 2019.
In short, shares were beaten up this morning, but investors have eased off as the conference call served to calm some jitters about FY19 guidance. Still, today’s losses cut short a rebound effort which saw the stock move from lows of $156.25 in late December to $173.40 yesterday, a nearly 11.0% move.
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