Shortages better than feared (STZ)
Constellation Brands reported FQ1 EPS of $2.33, slightly below consensus expectations of $2.35. Beer sales grew 14%, with shipment growth of 11% and 1% from an extra day. On-premise volumes were 11% of total beer depletions, nearly double last year. Pre-pandemic on-premise was 15% of depletion volumes, and the last Q1 was only 3%. Depletions were ahead of shipments which led to lower distributor inventories. Management does not expect shipments to catch up to depletions until the 2H of the year. The worry over inventory levels was the largest concern going into the results. Beer operating margins expanded 110bps due to favorable pricing, SG&A leverage, and Fx, while higher transportation costs, operational costs, and marketing were headwinds. Marketing spends increased by 70bps.
Modelo Especial had a depletion growth of 12%. Modelo Especial was the #1 share gainer in the entire U.S. beer category and moved up to second place in brand dollar sales in IRI channels. Corona’s hard seltzer continues to hold its ground, keeping fourth place with the addition of a second variety pack. Pacifico depletion growth was an impressive 35% in the quarter. It was the fourth-largest share gainer in the import segment. Wine and spirits sales decreased 22%, with shipments down 38%. Excluding the divestitures, organic growth was 16%, with shipment volume growth of 6%, while depletions were down 8%. The segment’s operating margins contracted 540bps mostly due to the sale of smoke-tainted wine during the quarter.
Constellation Brands recorded an impairment of $665M from the Mexicali plant being stopped. The company also recognized a $745M decrease in the fair value of the Canopy investments. The combination likely does not receive much attention, but the Mexicali plant is in the past. The company announced a new ASR of $500M in Q2 after repurchasing $523M for 2.2M shares through June. EPS guidance was raised by $.05 to $10-$10.30, reflecting the additional share repurchase. Management made clear that gross margins would contract for the year due to the depreciation from the Obregon expansion, operational cost inflation, and negative mix from hard seltzer growth. For Q2, marketing costs are expected to be roughly 200bps higher. Offsetting the margin pressure is lapping the easier sales comparisons to when the Mexican production shutdown occurred. Management indicated that June depletion trends were strong. $1.4B in write-downs/impairments and the first EPS miss in three years, yet investors were still pleased with the results, which speaks to the underlying strength and direction of the beer business.
Canadian beer sales decelerate (TAP)
Domestic beer sales by volume in Canada increased 0.4% YOY in May, a deceleration from 3.7% in April. Imported beer sales by volume in Canada decreased 37.3%, an improvement from -21.9% in April. Total beer sales by volume decreased 5.4%. Canada continues to have more restrictions for the on-premise channel than the U.S., in part due to lower vaccinations rates. Some on-premise restrictions are easing in parts of the country, but Toronto remains shut down. Indoor dining has been banned in Toronto for longer than nearly every other major city in the world. Ontario’s Premier Doug Ford said earlier this week that they are “very, very close” to moving to the third step in the reopening plan, which would allow indoor dining.
Heatwave for potatoes (LW)
There is a record heatwave in the Pacific Northwest where temperatures average in the 70s at this time of the year; they see the thermometer climb past 100 degrees. In the Northwest, 79.8% of the region was in a drought as of last week. The region’s potato crop is in good condition, and the Columbia Basin, which accounts for 90% of Washington’s production, has ample water. Industry observers said the potato crop was enjoying nearly perfect growing conditions until the recent heatwave. The harvest is expected to get underway in a couple of weeks. Last year, there were many concerns the industry would have an extra billion pounds of potato inventory. Still, due to better demand from retailers, the excess ended up at about 200 million pounds. Potato acreage in Washington is expected to be up about 5,000 acres to 160,000 acres this year. According to Chris Voigt, executive director of the Washington State Potato Commission, processor contract prices were down on average 3% and do not reflect the higher input costs like labor for the growers. That has led to growers looking to higher prices from the fresh market for their uncommitted potatoes.
Lamb Weston is on our long list in our position monitor. Foodservice sales are recovering, and the supply/demand outlook is in balance. We expect that the demand outlook for French Fries in the foodservice channel and abroad will encourage a supply response next year.
