The solid report comes on the heels of yesterday's announcement that it has divested its low end wine and spirits portfolio, selling it to E & J Gallo for $1.7 billion. It was reported about a month ago that STZ -- as well as investors -- were hoping it would net around $2 billion for the portfolio. So, there is some disappointment regarding the sale amount.
However, STZ cutting the cord on the low-end wine category is viewed as a win overall because that category has been weighing the company down. As management noted during the earnings call earlier this morning, consumer trends are shifting more towards higher end brands. So, the divestiture is essentially addition-by-subtraction as STZ's portfolio is more aligned with higher-growth categories, which it intends to support through more aggressive marketing.
In short, the past two days have featured a pair of positive catalysts for the stock, which is currently higher by nearly 10% on the week to trade at its highest levels since late 2018.
Beer Business Continues to Drive Results
Beer net sales climbed higher by 11.6% to $5.2 bln for the year and by 9.3% to $1.09 bln for the quarter, driven by continued impressive performance from Modelo and Corona. During the earnings call earlier this morning, management commented that Modelo is the fastest growing major beer in the industry, growing by double digits in 41 of 50 states, and is now the #1 brand in California. Despite Modelo's high growth, STZ believes there is significant room for growth for the brand as less than 5% of the general market currently drinks Modelo. Based on its out-performance relative to the industry, management believes that it should command more shelf space in retail channels.
As for Corona, it is now the largest brand in the high-end beer category and is expected to pass Coors soon in the overall U.S beer market. The past year represented a monumental shift for the Corona brand as it became a more comprehensive family of products. Namely, it launched Corona Premier, expanded Corona Familiar, and is about to launch Corona Refresca nationally.
Similar to Modelo, STZ will be making significant investments to support Corona this year, including in both social media platforms and TV. It is expecting to have a heavy presence in the NFL and NBA, while also becoming a first time sponsor for the PGA, US Tennis, and for several NFL teams.
Operating margin also expanded by 250 basis points to 40.5% in the beer category due to favorable pricing and lower marketing spend. Transportation and wage expense continue to provide some downward pressure, but, STZ has been able to offset those headwinds through improved pricing.
The wine and spirits segment continued to be a laggard as net sales dropped to $707.1 mln in the quarter from $765.0 mln in the prior year quarter. Once again, low-end brands were the primary culprit for the weak performance. Outside of that, there were some bright spots, though. For instance, SVEDKA Vodka posted strong growth, and, the Robert Modavi Private Selection wines benefited from innovations such as rum barrel aged products.
STZ provided guidance in its press release, but, due to the divestiture, it is not comparable to the Street's estimate. For FY20, it expects to generate EPS of $8.50-$8.80 -- the non-comparable consensus is $9.23 -- which includes the impact of the wine and spirits sale. This outlook also excludes any Canopy Growth equity earnings, share repurchases, or gain/loss on the wine and spirits transaction.
In the earnings slides, it does provide a FY19 comparable EPS number of $9.34, which would translate into a 7% dip in EPS based on the mid-point of STZ's guidance. The divestiture of the wine and spirits business is expected to negatively impact FY20 sales by 25-30% and operating income by 30-35%. In order to mitigate the declines, the company will be implementing a cost reduction plan for 2020 and 2021 to address stranded costs.
The company expects continued strong performance from the beer business, seeing net sales and operating income growth of 7-9% for FY20. Consequently, STZ plans on significantly ramping up its marketing efforts for Corona and Modelo as it looks to build on the momentum behind these brands. Simply stated, management was very bullish on the outlook and growth potential for both of these brands.