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Constellation Brands stands apart (and not in a good way) from nearly every Consumer Staples company by raising prices in 2023 by less than in 2022 while cost increases are accelerating from 2022 to 2023. Beer price increases will decelerate to +1-2% while costs accelerate to +HSD%. Over the past decade management has been disciplined by keeping annual price increases between 1-2%. The steady price increases are an integral part of its "growth algorithm." In 2022, management made a concession to the elevated inflationary environment by stepping up the pace of price increases slightly to 2-3%. In comparison, the overall beer CPI in December was +8.6%, with AB InBev and Molson Coors recently adding another round of price increases. Constellation Brands implemented an additional price hike in October and the consumers' reaction was swift, putting an end to any thoughts of further increases. What is worse - a strategy of not wanting to raise prices or not being able to? Regardless of the answer the result is the same for Constellation Brands in 2023 - margin contraction.
Constellation Brands' beer business will not be saved by the other segments. The cannabis industry continues to be stymied on the federal legalization front, weighing on Canopy. The upper end of the wine industry has been relatively immune to the broader economic pressures. However, costs are rising for the industry just like other CPGs and price increases have been challenging to pass through.
Has the weaker outlook already been discounted? The share price has risen 8% from its most recent low after reporting FQ3. Management has guided to a slight margin contraction in 2023. Despite the undemanding valuation relative to its peers and history, the outlook is for negative earnings revisions. Will 2023 remain on plan or will it be a lost year for EPS growth?
Our investment themes for the call are:
