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Why Is Constellation Brands (STZ) Down 2.7% Since Last Earnings Report?

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A month has gone by since the last earnings report for Constellation Brands (STZ - Free Report) . Shares have lost about 2.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Constellation Brands due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Constellation Brands Q1 Earnings Beat, Sales Miss

Constellation Brands has delivered first-quarter fiscal 2021 results, wherein the bottom line surpassed the Zacks Consensus Estimate, while sales missed the same. With this, the company has reported earnings beat for the 10th consecutive quarter. Despite the impacts of the coronavirus outbreak, results have been primarily aided by robust depletions and strength in the off-premise channel.

Q1 Highlights

Constellation Brands posted fiscal first-quarter comparable earnings of $2.03 per share, which increased 4% year over year and beat the Zacks Consensus Estimate of $2.03. The reported figure included Canopy Growth equity loss of 15 cents. Excluding the impacts of Canopy Growth, the company posted earnings of $2.44 per share, which grew 2% from the year-ago quarter.

Net sales declined 6.4% to $1,963.4 million and missed the Zacks Consensus Estimate of $1,981.5 million.

At the company’s beer business, sales dropped 6.3% to $1,384.1 million, driven by a 7.2% decline in shipment volume, offset by 5.6% depletion growth, while organic shipment volume fell 6.3%. Organic sales for the business were down 4%. Depletion volume benefited from robust off-premise channel sales, which more than offset the 75% decline in the on-premise channel due to coronavirus outbreak-related closures. Adjusting for one less selling day in the quarter, the company reported depletion growth of 7%. Shipment volumes and distributor inventory levels were hurt by the slowdown of beer production in Mexico due to the impacts of the COVID-19 outbreak.

Solid portfolio depletions and market share gains mainly stemmed from continued strength in the Modelo and Corona Brand Families. Notably, depletions for the Modelo Brand Family increased 12%.

Sales at the wine and spirits segment declined 7% to $579.3 million in the fiscal first quarter. Further, organic net sales for the segment dropped 4%. While the segment witnessed a 12.9% decline in shipment volume and a 1.1% fall in depletions, organic shipment volume fell 9.2%.

Margins

Adjusted gross profit declined 5% year over year to $1,033.6 million. Also, the adjusted gross profit margin expanded 60 basis points (bps) to 52.6%.

Constellation Brands' comparable operating income declined 1% to $691.3 million, while comparable operating margin improved nearly 190 bps to 35.2%.

Further, the operating margin at the beer segment expanded 240 bps to 41.7%, owing to gains from the timing of marketing spends and favorable pricing, offset by higher cost of goods sold (COGS). Wine and spirits segment’s operating margin expanded 240 bps to 28.3% on mix benefits, favorable price and lower SG&A expenses, offset by the divestiture of Black Velvet and higher COGS.

Financial Position

Constellation Brands ended the fiscal first quarter with cash and cash equivalents of $302.8 million. As of May 31, 2020, it had $11,639.3 million in long-term debt (excluding current maturities) along with total shareholders’ equity (excluding non-controlling interest) of $11,377.6 million.

In fiscal 2020, Constellation Brands generated operating cash flow of $686.5 million and adjusted free cash flow of $542.3 million.

On Jun 30, 2020, the company announced a quarterly dividend of 75 cents per share for Class A and 68 cents for Class B stock. The dividend is payable Aug 25 to its shareholders of record as of Aug 11.

Fiscal 2021 Outlook

Driven by the potential impacts of the coronavirus outbreak, the company is not able to provide guidance for fiscal 2021.

However, for the beer segment, it expects the slowed beer production in Mexico due to the COVID-19 outbreak to continue hurting shipments and distribution inventory in the fiscal second quarter. However, product inventories are likely to return to normal levels in the fiscal third quarter. Moreover, the company’s long-term outlook for the beer business remains unchanged.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Constellation Brands has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Constellation Brands has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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