Constellation Brands reported FQ3 EPS of $2.83 vs. consensus expectations of $2.89, an uncommon miss. The losses from Canopy were $.18 per share in the quarter.
Beer
The beer division’s sales growth was 8%, decelerating from 15% sequentially. Shipment growth of 2.7% slowed from 12.1% sequentially. Modelo was the top share gainer in the quarter while Corona was the #3, while the beer category itself slowed. Depletions growth slowed to 5.7% from 8.9% sequentially. Management said the deceleration developed later in the quarter against more difficult comparisons and in particular regions like California. Modelo depletion growth slowed to +4.4% while Corona depletion growth slowed to 1.3%.
Operating margins contracted 380bps due to higher raw materials, packaging, logistics, brewery expansion costs and increased marketing spend from an advertising shift. Management raised guidance slightly for the beer business from 8-10% sales growth to 9-10% and operating income growth from 3-4% to 4-5%.
Wine & Spirits
Wine & Spirits net sales decreased 4% with organic net sales falling 1% as organic shipments decreased 12.7%. Depletions decreased 5.6%, decelerating from -2.2% sequentially. Operating margins contracted 60bps. Management reaffirmed guidance for the division for sales growth of flat to -2% and operating income growth of 3-5%.
Guidance
Management lowered EPS guidance for the year to $11.20-11.60 from $11.20-11.60. Management expects price increases in F2024 will “be more muted” than this year. At the same time management expects inflation to be up HSD%. Contributing to the elevated level of inflation are hedging contracts renewing. Management expects next year’s beer operating margins to be even with this year.
Removing from the long list
Management lauds market share gains when discussing the slowdown in sales growth for the beer business. In an environment without a high level of consumer inflation, share gains at the expense of margins would not be well received. The same applies in a highly inflationary environment, especially when the competition is raising prices to cover costs. Management is standing apart from just about every CPG company by not trying to recoup margins lost to cost pressures. Instead, the company is lowering the level of price increases as costs increases pick up the pace.
I was wrong to expect management to accelerate price increases in F2024. With the dual share class collapsing I thought management would be more likely to raise prices above historical precedent to cover significant cost pressures in the industry.
Even at our lower than consensus estimates the valuation is attractive relative to its best in class organic growth peers in CPG. Modelo Oro’s national launch in March will likely drive an inflection in POS trends and a positive catalyst.
