Constellation Brands (STZ) closed 4.7% higher after reporting strong first quarter results this morning. Comparable EPS was roughly flat yr/yr but earnings are quite hairy for the company given the accounting treatment of the company's Canopy Growth (CGC) investment.
Revenue grew 2.4% to $2.1 bln*. The company's Mexican beer business continues to perform well. Depletions grew 7%, driven by Modelo Especial, which was the top market share gainer for the entire U.S. beer category with depletion growth of more than 17%.
However, on the call, management noted that additional shipments were made at the end of the quarter in efforts to mitigate tariff risks. In other words, there was some pull forward of demand. Constellation said that the second quarter already faced tough comparisons from 10% depletion growth last year. Meanwhile, the tariff tailwind will become a headwind going forward.
Offsetting this is the fact that unfavorable weather weighed on sales during the quarter. Analysts on the call seemed somewhat cautious on trends based on the IRi inventory data that they track.
Beer operating margins grew 150 bps to 39.3%, above the company's 39% target. Upside from sales, pricing, productivity and foreign exchange was offset by higher bottling and transportation costs.
The company reaffirmed its guidance for 7-9% net sales and operating income growth for the beer business this year.
Last month, the company launched Corona Refresca, giving the brand an entrance into the seltzer (malt beverage), which is blowing up in terms of popularity.
The wine and spirits business reported depletions down 0.7%. A strategic move toward faster growing higher margin drinks is working. Constellation's Power Brands generated industry leading depletion growth of 4%. The company is confident that the $1.7 bln sale of its lower-end wine and spirts portfolio will close in the second half of fiscal 2020. The FTC requested more information regarding the transaction last month.
Constellation raised EPS and cash guidance to include the results for the divested businesses through the second quarter. The company had previously assumed the deal would close by the end of the first quarter.
There are a few moving parts to the story, but Constellation remains an alcohol powerhouse trading at a premium to most brewers and distillers with a (~36%) stake in in the world's largest cannabis company Canopy Growth.
*Our original comment said revenue growth was 10%, comparing sales to last year's net sales without excise taxes.