Still on top (STZ)
Constellation Brands reported FQ1 EPS of $3.57 vs. consensus expectations of $3.46. Beer shipments increased by 7.6% compared to 10.5% in FQ4. Depletions increased by 6.4% (excluding divestitures), compared to 8.9% in FQ4 and 7% adjusted for an extra day. Modelo depletions increased by 11%, Pacifico increased by 21%, and Corona Extra decreased by 1%. Pricing was up less than 1%. Savings and efficiency initiatives led to nearly $50M in savings, partially offsetting the 7% increase in COGS. Operating margins for the beer division expanded by 260bps, compared to +30bps in FQ4.
The Wine & Spirits division decreased by 7%, with shipments declining by 5.1% and depletions declining by 12.7%. Operating margins contracted by 370bps due to lower volumes and higher COGS, somewhat offset by lower SG&A and marketing. Unfavorable COGS was primarily driven by higher grape costs. Overall gross margins expanded by 100bps, with the beer business expanding by 100bps and the wine and spirits division contracting by 320bps.
Management reaffirmed guidance for the year. The EPS range remains $13.5-13.80. The beer business is guided to grow by 7-9%, with EBIT growing by 10-12%. The wine business is expected to be flattish, but operating income will decline by 9-11%. With the construction of its newest brewery, this year is a peak year for capex investments. Although the shares declined after the earnings report, we view the FQ1 results as supportive of our long investment thesis. Margin drivers this year provide management with a lever most companies do not have. Depletion growth may have missed some expectations, and the base effects are more difficult going forward, but Constellation Brands is well-positioned to continue to gain share and hit its growth targets.
Spin-off filing (SPB, SN)
Spectrum Brands filed a confidential Form 10 registration statement for the spin-off of its home and personal care business. The company has previously announced that it is evaluating a spin-off, sale, merger, or other strategic transaction for the business unit. The HPC business was flat in the most recent quarter, but the declines in the home appliances sector “are now tempering,” the personal care business grew by HSD%, and the segment’s margins are improving. A split will separate the company into a pure-play pet and home and garden business and a stand-alone appliance HPC business. The HPC segment is the company’s largest, representing 43% of sales. The pet and home and garden business is seen to be a higher multiple business, which management believes a separation will unlock. SPB’s HPC products include small kitchen appliances (toaster ovens, coffeemakers, air fryers, etc.) and personal care tools (hair dryers, personal groomers, etc.). Some of its notable brands include Remington®, George Foreman®, Russell Hobbs®, Copper Chef®, and BLACK + DECKER®. The timing has improved for a spin-off. However, SharkNinja is the disruptor in the small appliances category.
