Guidance steals the spotlight (STZ)
Constellation Brands reported Q4 comparable EPS of $1.82 vs. consensus expectations of $1.57. The overall earnings report was not as upbeat as the headline results would suggest. Shipment growth exceeded expectations while depletions fell short. The lower guidance for the next year caused the shares to decline 4.6% yesterday and took away from the bottom-line beat.
Beer division - Beer sales increased 16% in Q4, driven by volume growth of 16%. Excluding Ballast Point from a year ago, sales grew 18%, with shipment volume growth of 17%. Depletion volumes grew 6%, and adjusted for the calendar grew 7.5%. The Texas winter storm had a 0.5-1% negative impact on depletion. Management said distributor volumes have returned to normal by year-end. Beer operating margins contracted 250bps due to higher marketing and higher COGS. Marketing was 380bps higher YOY due to the timing shift from the first half of the year. The Obregon plant was recently expanded by 5M hl. The company will be spending an annual CAPEX of ~$800M in F23-F25 for the beer business to add another 15M hl. Constellation said they would recognize a $650-680M impairment for its Mexicali brewery. The company is still pursuing some recoveries from the Mexican government, but that may result in a new brewery being approved in the South of the country. Remember, the appeal of the Mexicali location was its proximity to the California border.
Wine & Spirits division - Wine and spirits sales decreased 19% due to the sale of the low-price brand portfolio. The remaining brand portfolio had a 7% sales increase. Wine and spirits margins contracted 900bps due to the impact from the wildfires in California (not including a $46M smoke damage loss), increased marketing, and divestiture.
Guidance - Management guided comparable EPS in F2022 to be between $9.95-10.25 compared to the FactSet consensus EPS estimate of $10.43. Management expects the beer business revenues to grow 7-9% while operating income will grow 3-5%. As seen in the chart below, that would represent another margin pullback as the business enters another reinvestment phase.
Cannabis - Separately, Canopy Growth announced the acquisition of Supreme Cannabis for $256.9M. See our separate Cannabis note today for more detail. We have been vocal about our dislike of the Canopy Growth investment for Constellation Brands. The current trends in Washington D.C. do not support the idea of federal legalization by the next Canopy deadline.
Conclusion - Management’s margin outlook was the most impactful takeaway from the earnings results. In the near term, the next scanner data will also have the weakest results due to the comparisons against last year’s stockpiling. That will be followed by easier scanner data comparisons against the production shutdown while the on-premise business accelerates in its recovery. Depletions will then outpace shipments while growth in the measured channels will lag the non-measured channels. This is all to say, there are many moving pieces in this year’s comparisons, but management’s initial guidance is at the low end of our expected outcome range for the year.
Truly still shines lapping tough compares (SAM)
Off-premise alcoholic beverage sales declined 1.3% YOY for the week ended March 27, according to Nielsen. Compared to the same week in 2019, off-premise alcohol sales were up 23%, led by spirits up 37%, wine up 21%, and the beer category up 18%. Core beer sales decreased 4% YOY but increased 8% compared to 2019. Sales of premium lights decreased 7.6%, below premiums decreased 12.1%, cider decreased 11.7%, craft decreased 6.5%, FMBs excluding hard seltzer decreased 7.1%, and super premiums increased 0.3%. Sales of imports increased 9.5%, hard seltzers increased 27.8%, hard tea increased 44%, and non-alcoholic beer increased 41%.
For the four-week period ended March 27, total beer category off-premise sales decreased 2.2%, and for the YTD period ended March 27, sales increased 7.2%. For the four-week period, Boston Beer sales increased 31.8%, with Truly up 70.3%, Twisted Tea up 42.6%, and Samuel Adams down 21.4%. Over the same period, Anheuser-Busch InBev sales decreased 5.2%, Molson Coors decreased 9.7%, Blue Moon decreased 11.8%, Constellation Brands increased 6%, Heineken decreased 1.9%, and Mark Anthony Brands increased 2.4%. In hard seltzer, Bud Light Seltzer increased 38.2%, White Claw decreased 4.5%, and Corona Hard Seltzer decreased 24.3%.
Accretive Robot farmers (APPH)
AppHarvest announced Root AI's acquisition, an artificial intelligence farming startup that creates robots for indoor farms. The acquisition is expected to provide AppHarvest with “a baseline of harvesting support working alongside crop care specialists focused on more complex tasks.” As part of the acquisition, AppHarvest will also add Root AI's co-founders as Chief Technology Officer and VP of Technology. Using lasers, cameras, and countless images of tomatoes, the robots will help the workers identify issues with the plants and when to harvest. AppHarvest will pay $10M in cash and issue 2,328,000 shares for total consideration of $60M. Root AI had raised $9.5M to date in financing. AppHarvest sees Root AI’s technology as enabling the growth of other fruits and vegetables. Notably, despite the recent pullback in the share price AppHarvest still prefers to issue new shares. Due to the losses expected this year, issuing new shares will be accretive to EPS.
