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Constellation Brands (STZ -2%) delivers another split earnings report in Q2 (Aug), as one half of its business continues to shine while the other continues to land itself in hot water. The alcoholic beverage maker and distributor enjoyed steady gains in its beer business as sales and shipment volumes continued to rise while several banners captured additional market share. The resilience of STZ's beer portfolio contributed to another double-digit earnings beat in the quarter and supported a decent uptick in revenue.

However, tugging against the beer business's outsized strength was STZ's wine and spirits business, which continues to struggle amid challenging macroeconomic conditions, posting a 12.0% drop in sales on a 9.8% decrease in shipment volumes. STZ warned last month that trends in wine and spirits were worsening since the start of the year, which ultimately led to a $2.25 bln goodwill impairment loss in Q2, toward the higher end of management's $(1.5)-$(2.5) bln estimate.

STZ has been overhauling its wine and spirits business over the past few years, offloading 90% of low-end brands to realign its focus on the higher end of its portfolio, leaning on premiumization trends that have been boosting its beer business. CEO William Newlands commented last month that it was starting to see benefits from its renewed premium focus, which he expected to be reflected in quarterly results during the back half of FY25. However, poor economic conditions remain a wild card and could potentially delay anticipated benefits.

• On the bright side, STZ's beer business is performing nicely despite the current unfavorable economic climate. Beer achieved a 6.0% jump in net sales, supported by a 4.6% increase in shipment volumes. Depletions edged 2.4% higher, driven by consistent demand for Modelo Especial, which saw a roughly 5% lift, and the Pacifico brand, which boasted an approximately 23% boost.
• Operating margins remained buoyant, expanding by 270 bps yr/yr to 42.6%. STZ has undergone cost-saving initiatives, such as swapping out wood pallets for plastic pallets and altering stacking to improve logistics costs, helping to already achieve savings of around $260 mln of its $300 mln target. Management has remarked that it will continue to target additional savings even after hitting its goal.
• As a result of the sturdy performance within beer, STZ delivered adjusted EPS of $4.32, a 14% improvement yr/yr, and revs of $2.92 bln, a 3% jump. Also supported by continued strength in beer, STZ reiterated its FY25 guidance, including adjusted EPS of $13.60-13.80 and revenue growth of +4-6%. However, with STZ reaffirming these targets just last month, investors are not surprised that the company left them unchanged today.

The dichotomy between STZ's two businesses is creating a rift in the company's consolidated results and possibly stunting its stock price. Investors are growing impatient with the continuous drag wine and spirits are producing, making it pertinent that STZ turns around this business sooner rather than later. Unfortunately for the company, this still largely depends on when current economic headwinds will ease.