STZ passes its COVID test
Constellation Brands reported FQ1 EPS of $2.30 vs. consensus of $2.00. Excluding Canopy Growth losses EPS was $2.44. Total sales decreased 6%, and operating profit fell 1% - impressive considering the declines in on-premise consumption from COVID-19 and the throttling back of beer production in Mexico from government orders. Management had talked down Street expectations for shipments and depletions at a conference during the last week of the quarter. Shipments were at the low end of that -LSD to -MSD% range while depletions were at the high end of that +LSD to +MSD% range. Management did not speak to margins at the time. FQ1 results were much better than consensus modeled off the lowered sales driving the considerable upside to EPS expectations.
Beer organic sales decreased by 4%, with shipment volumes declining 6.3%. Beer depletion grew 5.6% or 7% when adjusted for one less selling day. Production in Mexico has resumed in June, and management expects some continued tightness in supplies in Q2 (particularly earlier in the quarter) with inventory returning to normal levels in Q3. Corona Hard Seltzer had a strong debut and benefited from launching before the pandemic stopped new product launches in the grocery channel. Corona Hard Seltzer has reached a 6% share and an ACV distribution of 65, which speaks to the channel power the brand has now. Management believes the brand extension is 90% incremental to current Corona customers. Modelo depletions grew 12%. Beer operating margins expanded 240bps, mostly driven by marketing spend that was delayed for later in the year when sporting events resume.
Wine & Spirits sales decreased 4% with shipment volumes down 9.2%, excluding divestitures and depletions down 1.1%. The division’s margins expanded 240bps driven by price increases and SG&A reductions. The division’s portfolio of brands will change even more dramatically next quarter when the sale of the low priced brands to E & J Gallo is completed. FCF grew 24% to $542M, and with the proceeds of the wine, sale leverage will be moving in the right direction.
Management’s comments about Canopy were of the overly bullish on the long-term opportunity sort that gives us concern about further equity investments. However, the company has several years before it needs to make another decision on Canopy.
The combination of current depletion trends continuing to be healthy and affirmation of Mexican production resuming in June was well received by investors. The upside to margins was a positive surprise, but the marketing spend for beer was just delayed to when the investment is better spent. We continue to see Constellation Brands outperforming from here as shipments resume and the many concerns that were an overhang on the stock a couple of months ago continuing to recede.
Permanent restaurant closures (SYY)
According to Yelp, since the beginning of March, 23,981 restaurants on its platform shut down entirely at some point during the pandemic. Of those restaurants that closed, 53% have closed permanently.
The permanent closure rate of restaurants exceeds other service sectors, including retail at 35%, beauty salons at 24%, and gyms at 26%. According to the National Restaurant Association, 3% of restaurants have permanently closed, which would be 20,000 restaurants compared to the ~12,000, according to Yelp. According to Womply, a CRM provider, 20% of local restaurants remain closed as of June 27, as seen in the following chart. The higher number from Womply reflects that its amount is not permanent closures, and its customers are smaller and have less financial resources than chains. Federal assistance has helped the restaurant industry stay afloat with many operators still in a wait and see mode while others are surviving on take-out and outdoor seating. Independent restaurants are Sysco’s most profitable customer group, and a high closure rate would represent a significant challenge for the company and its ability to reach past sales and earnings. Sysco is the best idea short.
Alcohol sales re-accelerate (BUD)
Total alcohol sales grew 25.4% in the off-premise channel for the week ended June 20, accelerating from 21.2% the previous week. Beer category sales in off-premise retailers increased 21.2% for the week, up from 20.3% the previous week, as seen in the following chart. Off-premise sales never really slowed despite the re-opening of bars and restaurants over the last few weeks. During the pandemic beer category, off-premise sales have grown 21.4% (volumes +17.3%) compared to YTD growth of 16%. Beer sales grew 13.1% over that time. Now that the three largest states have halted on-premise consumption of alcohol either statewide or in certain counties, the impact is uncertain. Hard seltzer sales grew 234%. Super premiums grew 22.3%, craft grew 17.1%, and FMBs grew 19.3%. Wine sales grew 23.7% up from 20.1% the previous week was driven by wines priced above $20. Spirits grew 39.5%, the strongest week since Cinco de Mayo.
