Q1 review, capital deployment changes from here (STZ)
Constellation Brands reported comparable EPS of $2.66 (including Canopy Growth results) vs. consensus of $2.52. Excluding Canopy Growth equity losses of $.24 per share, Constellation Brands reported adjusted EPS of $2.90, up 16% YOY. Upside was mostly driven by better top-line growth and below COGS expenses.
Beer division sales grew 21%, driven by shipment volume growth of 17% which compares to 11% growth in the previous year. Beer depletion growth was 8.7% driven by Modelo depletion growth of 15%, while Corona Extra depletion growth was 4% and Pacifico’s growth was 21%. The on-premise channel grew over 30% and accounts for 13% of volume, up 200bps YOY. Beer operating margins contracted 260bps due to inflationary pressures. Marketing costs grew in absolute dollars, but leveraged 40bps to 9%.
Wine & Spirits grew 2%, beating guidance for a decline. Shipments grew 1.5% while depletions grew 1.2%. Wine and Spirits' operating margins contracted 330bps to 19.6%. Mix and price benefits were offset by higher COGS in grapes, glass, warehouse, and transportation costs.
Regarding price increases, management remained proponents of their long-term pricing of 1-2%, but said they are monitoring the current situation. While COGS inflation remains a risk for future gross margins, Constellation Brands has the ability to quickly adjust pricing by SKU. The pricing optionality does not go away if management decides belatedly to adjust it. While acceleration in COGS inflation poses a risk to EPS in the near term, it also increases the likelihood that management will adjust their pricing strategy in the near term and reverse the EPS estimate revisions. Management reaffirmed EPS guidance of $11.20-11.50.
The special committee of the board agreed to a 26.5% premium in cash compensation, or $1.5B to convert the Class B super-voting shares to Class A shares. The Sands brothers will remain on the board but in non-executive functions. The Sands’ move to non-executive roles saves ~$17.5M in salary and other costs which partially offsets the cost of $1.5B. Management had not decided yet on how much new borrowing would be needed to fund the $1.5B, but it seems likely to slow share repurchase in the near term after spending $1.3B in repurchases through the first four months in F23.
Most importantly shareholders will now have voting control over the company which is increasingly important with Constellation Brands continuing to provide financial support for Canopy Growth, most recently with debt for share exchange. Additional support for Canopy Growth should be increasingly unpopular with shareholders given the dismal near-term outlook for cannabis legalization in the U.S., Canopy Growth’s poor market position in Canada, and the alarming cash burn. With shareholders having voting control there should be more of a voice in the board room on why Constellation Brands needs to be in cannabis, why it needs to support a poorly positioned company within the sector, and why its entry in the market needs to be through equity ownership.
Grocery vs. Superstore traffic (KR, ACI, GO)
Conventional grocery stores benefited during the pandemic as consumers consolidated grocery shopping trips. As the pandemic ebbed in late 2021 visits to grocery stores began to grow similarly to visits to superstores. That trend changed in mid-April as visits to superstores began to consistently outpace visits to grocery stores as seen in the chart from Placer.ai below. More consumers are looking for ways to save money as food inflation and higher gasoline prices pinch their budgets. As a discount grocer Grocery Outlet is positioned to gain customer visits with the increasing pressure on consumers' budgets.
Better for beans (LANC)
In its annual Acreage report, the USDA estimated corn acres are down from last year while soybean acres are up. Corn acres are estimated at 89.9 million, down 4.3% YOY. The revised estimate is up from March’s 89.49 million acre estimate and close to expectations of 89.86 million. Soybean acres are estimated at 88.3 million, up 1% YOY. This is down from March’s 90.955 million estimate and below expectations of 90.446 million. The new acreage estimate implies there are 150 million bushels of less soybean production potential for the season. Wheat’s planted area is estimated to be up 1% YOY. Oat acres are estimated to be down 158,000 acres, in line with the spring planting intentions.
The USDA’s grain stock report estimated that total U.S. corn stocks are up 6% YOY while soybean stocks are up 26%. The inventory report was in line with expectations, showing that farmers have held onto more of their crops in the expectation of higher prices. Farmers’ focus will turn back to the weather after the release of two reports from the USDA yesterday. Soft commodities have sold off recently after improved growing conditions followed by a wet planting season. Other commodities have also come under pressure in the financial markets. Lancaster Colony’s significant exposure to salad dressings and by extension soybean oil drove its inflationary impact higher than many of its peers in FQ3. Higher soybean prices are not the only driver of soybean oils, the increases we have seen in alternate edible oils (palm oil from Malaysia’s export ban or sunflower oil from the invasion of Ukraine) have pushed prices higher as well.
