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For alcoholic beverage maker and distributor Constellation Brands (STZ), the saying "the more things change, the more they stay the same" seems to be very fitting after the company reported mixed Q1 results. As has been the case for many quarters, STZ's beer business was a pillar of strength, while the wine and spirits business continued to lag after undergoing a major overhaul over the past few years.

• Younger consumers in particular have been gravitating towards premium imported beers and STZ's product portfolio fits right into that sweet spot. Most notably, Mexican lager Modelo Especial has been a star for STZ, catapulting to the top of the list in dollar sales among all brands in the U.S. Led by Modelo and Pacifico, which saw impressive depletion growth of 11% and 21%, respectively, in Q1, net sales increased by 8% for the total beer business.
• Volume growth, combined with pricing and cost savings initiatives, drove operating margin higher by 260 bps yr/yr to 40.6%. This, in turn, helped push EPS higher by 23% to $3.57, beating expectations for the sixth consecutive quarter.
• While the beer business seems to be mostly insulated from sluggish consumer spending trends, the same can't be said of the wine and spirits business. STZ stated that the U.S. wholesale market across most price points in the wine category continued to face unfavorable market conditions in Q1. As such, net sales for wine and spirits declined by 7% and operating margin decreased by 370 bps to 15.3%, leading to a 25% drop in operating income to $59.7 mln for the segment.
• Although the struggles for wine & spirits currently appear to be mostly macro-related, the lack of progress in the turnaround initiative has become a source of frustration for investors. Recall that in early 2021, STZ finalized a deal to sell its lower-priced wine brands to E.&J. Gallo Winery for $810 mln in an effort to prioritize its higher end brands. At this point, it's safe to say that the deal hasn't had the positive impact on margins and earnings that STZ hoped for.
• In today's earnings press release, STZ disclosed that new commercial and operational initiatives are underway to address the market headwinds in the wine and spirits business. Whether those efforts help kickstart this long-standing turnaround plan remains to be seen. The good news for STZ, though, is that its beer business is by far the larger of the two, accounting for about 85% of total Q1 revenue.

Lastly, despite exceeding Q1 EPS estimates, STZ chose to merely reaffirm its FY25 EPS guidance of $13.50-$13.80. In fact, the company reaffirmed all of its FY25 guidance, including enterprise net sales growth of 6-7%, beer net sales growth of 7-9%, and a net sales decline of 0.5% to growth of 0.5% for wine and spirits. STZ's decision to keep its EPS outlook unchanged may be a source of disappointment, but, on the other hand, the reaffirm of its net sales guidance for wine and spirits may be providing some relief after another rough performance in Q1.