Constellation Brands Inc.STZ posted robust first-quarter fiscal 2018 results, wherein both the top and bottom line grew year over year. Notably, this is the 11th consecutive earnings beat recorded by the company. However, Constellation Brands broke its eight quarter long trend of posting positive sales surprise. Nonetheless, to perk up investors' confidence management raised its earnings guidance for fiscal 2018.
Consequently, shares of Constellation Brands gained nearly 7.2% in the pre-market trading session following the sturdy results. Further, driven by its splendid past performance, this Zacks Rank #2 (Buy) stock jumped 16.4% in the last one year, compared with the Zacks categorized Beverages - Alcoholic industry's 0.9% growth.
During the quarter, Constellation Brands benefited from its efforts to drive consumer demand for its robust brand portfolio. Also, results were backed by contributions from acquisitions along with continued strength in the company's beer business in particular.
The company's adjusted earnings for first-quarter fiscal 2018 surged 52% year over year to $2.34 per share, outperforming the Zacks Consensus Estimate of $1.98. Reported earnings came in at $2.00 per share, up 29% year over year.
Net sales advanced 3% to $1,936.0 million, on the back of a 7% rise in organic sales and gains from buyouts, partly countered by sales loss from the divestiture of its Canadian wine business. However, the top line fell short of the Zacks Consensus Estimate of $1,949 million thus breaking its solid trend.
Sales at the company's beer business improved 8%, thanks to higher volumes and favorable pricing. Further, beer sales were backed by the company's solid brands which witnessed depletions of nearly 12% in the quarter.
Wine and spirits' sales fell 4%, as organic sales growth of 6% was negated by the impact of the Canadian wine business revenues. The organic sales growth was fueled by enhanced mix, volumes and pricing. During the quarter, the U.S. shipment volume outdid depletion volumes, mainly due to the timing of promotional activities. However, this segment witnessed considerable margin improvement. Also, spirit sales rose in double-digits mainly backed by its High West Whiskey portfolio.
Cost and Margin Performance
Adjusted gross profit for the quarter improved 15% year over year to $1,003.0 million. Adjusted gross profit margin expanded 530 basis points (bps) to 51.8%.
Constellation Brands' comparable operating income grew nearly 22% to $668.8 million with the comparable operating margin expanding 530 bps to 34.6%. This growth was backed by a 22% operating income improvement at both the beer and wine and spirits businesses. The beer segment gained from higher volume, effective pricing and lower product costs, while improvement at the wine and spirits segment was attributed to volume growth, contributions from acquisitions and favorable pricing and mix. This was partly offset by the sale of Canadian wine business.
Constellation Brands ended the quarter with cash and cash equivalents of $199.1 million. As of May 31, 2017, the company had $8,077.2 million in long-term debt (excluding current maturities) and its total shareholders' equity was $7,397.8 million.
In first-quarter fiscal 2018, Constellation Brands generated $381.6 million in cash from operations and free cash flow of $165 million.
The company's solid cash flows and financials provide it with the flexibility to pay dividends. Incidentally, on Jun 28, the company announced a quarterly dividend of 52 cents per share for Class A and 47 cents for Class B shares. This dividend is payable on Aug 23, to shareholders on record as of Aug 9.
On Jun 16, Constellation Brands acquired Schrader Cellars' iconic wines, which enhanced its fine wines portfolio. The Schrader Cabernet Sauvignon portfolio is the highest-rated American Cabernet Sauvignon portfolio consisting of wines sourced from the premier vineyards of Napa Valley. The agreement comprises vineyard sourcing, current inventories, and eight Schrader Cabernet Sauvignons. Terms of the deal remained under covers.
In Dec 2016, Constellation Brands completed the sale of its Canadian Wine business to Ontario Teachers' Pension Plan, which is Canada's largest single-profession pension plan for C$1.03 billion. The sale forms part of the company's strategy to focus on premium, margin accretive, growth opportunities.
Fiscal 2018 Outlook
Management remains encouraged with its superb results, with the beer business in particular. In fact, the company also raised its adjusted earnings outlook for fiscal 2018, based on the confidence in its beer business. Further, management raised its fiscal 2018 operating income targets for both segments, while retaining the sales forecasts.
The company now envisions adjusted earnings guidance in a range of $7.90-$8.10 per share, compared with its previous guidance range of $7.70-$8.00. On a reported basis, EPS for fiscal 2018 is anticipated in the range of $7.55-$7.75, down from $7.65-$7.95 projected earlier.
The company expects net sales for the beer segment to grow 9-11%. Operating income at this segment is anticipated to increase in a band of 13-15%, compared with the prior guidance of 11-13%.
Sales at the wine and spirits' segment are still projected to decline 4-6%, whereas the operating income is now expected to rise 5-7% in fiscal 2018. Earlier, the company expected operating income at this segment to remain flat year over year. These projections include the impact from the sale of its Canadian wine business, and benefits from the High West, Charles Smith and Prisoner buyouts.
Certain other factors were taken into consideration before providing the earnings guidance. These include an interest expense expectation of $340-$350 million, an approximate tax rate of 22% and weighted average diluted shares outstanding of approximately 201 million.
The company anticipates capital expenditure for fiscal 2018 in the range of $1.175−$1.275 billion with roughly $1.0 billion estimated for expansion of Mexico beer operations.
The company's free cash flow expectation for fiscal 2018 lies in the range of $725−$825 million. Operating cash flow is projected in the range of $1.9-$2.1 billion.
Other Stocks to Consider
Craft Brew has surged a whopping 65.2% in the last one year. Also, the stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Heineken, with long-term earnings per share growth rate of 7.6%, carries a Zacks Rank #2.
Carlsberg, also carrying a Zacks Rank #2 has long-term EPS growth rate of 7.3%.
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