Constellation Brands Inc. STZ has lowered its financial outlook for fiscal 2025, citing continued soft trends in its Wine and Spirits business. The company noted that weakness persisted in the U.S. wholesale wine and spirits market, leading to declines in the overall wine market and its mainstream and premium wine brands. The company attributed the weakness in consumer demand to ongoing macroeconomic headwinds, particularly rising unemployment.
As a result of this weakness, STZ expects to record non-cash goodwill impairment charges of $1.5-$2.5 billion within its Wine and Spirits business in the second quarter of fiscal 2025. While the company continues implementing tactical pricing and marketing actions to support the demand for its core wine and spirits brands, it is experiencing operating deleverage from more significant top-line challenges, further contributing to goodwill impairment charges for this business.
The commercial and operational initiatives introduced earlier this year in the Wine and Spirits business are enhancing the performance of the segment’s largest brands. However, the company is encountering additional category headwinds in this business, impacting its fiscal 2025 outlook.
Despite the dismal trends and a soft outlook, shares of Constellation Brands rose 2.5% on Sept. 3, 2024. Moreover, shares of the Zacks Rank #3 (Hold) company have grown 2% in the year-to-date period, outperforming the broader industry’s decline of 10%.
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STZ’s Revised FY25 View
Constellation Brands slashed its sales and GAAP earnings per share (EPS) outlook for fiscal 2025 due to the aforementioned headwinds, predominantly the expected charges in the Wine and Spirits business.
STZ expects enterprise net sales for fiscal 2025 to increase 4-6% year over year compared with 6-7% growth stated earlier. The lowered view reflects the impacts of the macroeconomic headwinds affecting consumer demand, mainly unemployment, and prolonged inventory destocking in the wine and spirits markets.
The Wine and Spirits business is expected to record a 4-6% decline in net sales versus the prior view of between a 0.5% decline and 0.5% growth. Despite the adverse impacts of the ongoing macroeconomic challenges on its consumers, the company expects its Beer brands to remain strong, with only marginal shifts to value packs and value-oriented channels. As a result, STZ expects to deliver strong beer volumes for fiscal 2025.
Volumes for the Beer business are expected to increase in the mid-single digits for fiscal 2025, with low to mid-single-digit growth in its top five states and within the high-single-digit range on average across the rest of the country. The company notes that its top five states, which account for more than 50% of its volumes, have witnessed prominent headwinds related to the tough macroeconomic environment.
Backed by the robust beer market trends, the company lowered its Beer business sales outlook by only 1 percentage point. It expects net sales for the Beer business to increase 6-8% compared with 7-9% growth mentioned earlier.
Forecasts for Constellation Brands’ Operating Income & EPS
Including expected Wine and Spirits goodwill impairment charges, the company anticipates reported enterprise operating income to decline 36-68% year over year for fiscal 2025 compared with an increase of 10-12% mentioned earlier. Meanwhile, the company expects comparable operating income to increase 8-9% year over year versus 8-10% growth mentioned earlier.
The company expects operating income for the Wine and Spirits business to decline 16-18% year over year in fiscal 2025, adjusting for the top-line trends. Earlier, the company expected operating income for the Wine and Spirits business to record a year-over-year decline of 9-11%.
However, the company raised the lower end of its previous Beer business operating income guidance, driven by incremental benefits from its cost savings and efficiency initiatives, partly negated by increased marketing investments. It expects operating income for the Beer business to improve 11-12% year over year compared with prior stated 10-12% growth. The company reiterated its corporate expense guidance of $260 million and Equity in Earnings view of $30 million.
STZ expects a GAAP EPS of $3.05-$7.92 for fiscal 2025, down from the prior mentioned $14.63-$14.93 due to the impacts of impairment charges on its Wine and Spirits business. Despite macroeconomic pressures, the company remains confident in achieving its previous outlook of double-digit comparable EPS growth. As a result, it has raised the lower end of its prior comparable EPS guidance from $13.50-$13.80 to $13.60-$13.80.
STZ’s Guidance for Other Financials Almost Intact
Constellation Brands expects interest expenses of $430 million for fiscal 2025, a decline from the prior mentioned $445-$455 million. It estimates the reported tax rate to be 11% for fiscal 2025 compared with the previous tax rate of 12%, mainly including impairment charges.
However, STZ reiterated its comparable tax rate guidance of 18.5%. It estimates non-controlling interest of $35 million and shares outstanding of 183 million.
Constellation Brands reaffirmed its operating cash flow forecast of $2.8-$3 billion for fiscal 2025. It expects a free cash flow of $1.4-$1.5 billion. STZ plans to incur a capital expenditure of $1.4-$1.5 billion in fiscal 2025.
Conclusion
STZ’s lowered outlook for fiscal 2025 reflects further weakness in the Wine and Spirits business, raising questions regarding a near-term recovery of the segment. The incremental category headwinds in the Wine and Spirits business, combined with persistent macroeconomic pressures, present significant risks for this segment. However, the company’s Beer business remains resilient, showing minimal impacts on the broader economic environment.
Stocks to Consider From STZ’s Broader Sector
We have highlighted three better-ranked stocks from the Consumer Staple sector, namely The Chef's Warehouse CHEF, Ollie's Bargain Outlet OLLI and Flowers Foods FLO.
The Chef's Warehouse offers specialty food products in the United States. CHEF presently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 33.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus estimate for CHEF’s current financial year’s sales and EPS indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported figures.
Ollie's is a value retailer of brand-name merchandise at drastically reduced prices. OLLI currently has a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 7.9%, on average.
The Zacks Consensus Estimate for OLLI’s current financial-year sales and earnings suggests growth of 8.1% and 12.7%, respectively, from the year-ago reported figures.
Flowers Foods emphasizes providing high-quality baked items, developing strong brands, making innovations to improve capabilities and undertaking prudent acquisitions. It currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for FLO’s current financial-year sales and earnings indicates growth of 1.1% and 4.2%, respectively, from the year-earlier actuals. FLO has a trailing four-quarter earnings surprise of 1.9%, on average.
5 Stocks Set to Double
Each was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2024. While not all picks can be winners, previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.
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Today, See These 5 Potential Home Runs >>Constellation Brands Inc (STZ) : Free Stock Analysis Report
Flowers Foods, Inc. (FLO) : Free Stock Analysis Report
The Chefs' Warehouse, Inc. (CHEF) : Free Stock Analysis Report
Ollie's Bargain Outlet Holdings, Inc. (OLLI) : Free Stock Analysis Report
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