Beer demand still a key driver to Constellation Brands' profits

Constellation Brands (STZ) — the maker of festive summer beers Corona and Modelo — saw a stock bump in pre-market trading, but its gains have since deflated in Wednesday's regular session. The alcohol company reported fiscal first-quarter earnings figures that beat profit estimates. Revenue fell just short of expectations — reported $2.66 billion ($2.67 billion expected) — while adjusted earnings outpaced estimates — $3.57 per share ($3.47 per share expected).

Citi US beverages and household products & personal care research analyst Filippo Falorni joins The Morning Brief to explain Constellation Brands' growth driven by overall beer demand and other consumer innovations, such as its spirits segment, low-calorie drinks ahead of the summer holidays, and sporting event promotions.

"They reported 8% year over year sales growth in the beer business, and 6.4% depletions growth, which is a measure of volume. And those were very strong results and better than expected, expectations were more in the 5.5% range," Falorni tells Yahoo Finance. "So again, continue very strong trends for the beer business driven by the Modelo Especial brand, which was up 11% in the quarter."

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This post was written by Luke Carberry Mogan.

Video Transcript

We're taking a look at shares of Constellation brands this morning, the stock up over three and a quarter percentage points after posting better than expected profit for its fiscal first quarter and reiterating guidance for the full year here for deep dive into the latest report.

We are joined by Philip of City US, beverages and household products and personal care research analyst.

It's great to speak with you this morning.

Thanks for coming on.

So I know that you mentioned that the beer scanner data was a little bit of a concern.

What do we know now about the degree to which beer impacted Constellation brands off of this print?

Yeah, absolutely good morning everyone.

And uh thanks for having me.

So look, the quarter was very solid from Constellation brands.

There was some concern because the the track channel data which is struck by Nielsen and circa show a little bit of slow down uh particularly into April and May.

Um but the quarter was better than expected.

They reported 8% year over year sales growth in the beer business um and 6.4% depletion growth which is a measure of volume and those were very strong results and better than expect expectations that were more in the 5.5% rate.

So again, continue very strong trends for for the beer business driven by the Modelo special brand which was up 11% in the quarter.

Yeah, also craft spirits portfolio, achieving double digit growth in dollar sales.

They mentioned that kind of outperformed what they were expecting on the higher end of the spirit segment there.

What is the trend that you're tracking within that portion of the business?

Yes, Brad.

So that part of the business is part of the wine spirits segment, which overall has been under performing and it's mainly driven by the fact that the the biggest part of the wine spirits business, which by the way is only 20% of the company sales is the wine side.

So it's the Woodbridge brand.

But as you said, the the side which is the premium spirit side of the business has been doing extremely well.

It up double digit the issue in that part of the segment is that it's small and it doesn't really drive a lot of the segment sales, but they continue to grow.

Well, particularly with the two big brands that they have there, which are High West in Whiskey, and Mika and Casa Noble in Tequila.

I want to talk about some potential catalysts for the stock moving forward because you say that you are listening in for innovations to come just give me some context because I obviously don't cover uh this area every single day the way that you do, how much do those innovations drive sales versus just the bread and butter, typical bottle of Corona sales.

Yeah, absolutely.

That's a very good point.

Like historically, innovation has been driven about 20% of the company's sales growth in any given year.

Last year, they had a very important innovation with Modelo Oro, which is a low calorie, low carb version of Modelo special.

Uh and that was particularly a success last year until last summer.

This summer, the big innovation is going to be Corona S brew, which is a citrus brewed version of Corona, which, you know, it's very drinkable, very summery and really good timing with the, with the launch ahead of Fourth of July and, and the summer season, you know, thi this is gonna be I think a big summer for consumption and, and it's primarily driven by what we're seeing in sport in the Olympics.

How does this company have anything to benefit at least kind of secondary wise from what's taking place within this massive four year event?

Yeah, absolutely.

Look, sport, sporting events tend to be like a driver of social gathering and a driver of uh occasions for, for drinking, for, for to be a business.

Uh when you think about the geographic exposure, they are, they are essentially entirely us based.

So for them, they would not have direct implication from the events from the Olympics in Paris.

But there will be some secondary impact as you said from people gathering and watching the Olympics or more recently, the Cup America uh which has been played in the US.

And it's, it's an event that tends to drive a lot of attention, particularly among Hispanic consumers and constellation tend to skew a little bit more to Hispanic uh consumer with 60% of their consumer base being um in that part of the population.

So to me, you got Cup America, you got the Euro Cup in, in um uh in Europe playing right now.

I know you got the Summer Olympics in Paris, all those could drive more social interaction and, and ultimately more beer drinking occasions.

You know, as I'm looking at the fiscal 2025 guidance assumptions here, one of the major things that we've heard as a theme over the course of this earnings season uh is, is about capital expenditures here and they're looking for that to come in at about 1.4 to $1.5 billion.

Um And that includes some, some other factors as well, but I I bring that up because do you think the next innovation from Constellation brands comes homegrown or is it via an acquisition?

Yeah, look when you think about their, their cap expanding is really to expand their Mexican uh brewing operation.

So they right now they have two facilities in Mexico where they produce all their Corona and Modelo brands, uh which are one in Obregon and one in Nava.

They are opening a third manufacturing facility in Veracruz, which is in the southeast of Mexico.

And that should help have give the company enough capacity capacity for them to drive further innovation.

Again, there's been an area where they, they've stepped up innovation more recently in recent years, as I mentioned, model or last year, Corona S brew this summer, if you go back a couple of years, they launch Corona Premiere, which is also another low calorie, low carbs um innovation.

So I would expect their innovation to come more internally.

So, uh from their own brands, um and from an acquisition of Sao Paulo in the past, they've done a few acquisitions in the beer business.

The last one was um the acquisition of Bala Point in 2016.

They haven't really been successful.

So I would think they would probably continue to push forward an innovation on their core Mexican uh beer portfolio.

Good note there.

Flipo.

Thanks so much for taking the time here this morning.

Great to see you Flipo Fone Us beverages and HPC research analyst at city.

Appreciate it.