Constellation Brands Inc. (STZ - Free Report) delivered first-quarter fiscal 2019 results, wherein the top line beat estimates while earnings lagged. This marked an earnings miss after 14 consecutive beats. Results were mainly impacted by higher marketing expenses and transportation costs that led to a decline in the operating margin. The company reiterated its adjusted earnings guidance for fiscal 2019 while it raised GAAP earnings view.
Shares of Constellation Brands have declined 4.3% in the pre-market trading session, following the dismal bottom-line results. Overall, this Zacks Rank #3 (Hold) stock increased 2% in the last three months, against the industry’s decline of 10.5%.
The company’s adjusted earnings for first-quarter fiscal 2019 declined 5% year over year to $2.20 per share, missing the Zacks Consensus Estimate of $2.42. However, reported earnings were $3.77 per share, up 90% year over year.
Net sales improved 6% to $2,047.1 million and surpassed the Zacks Consensus Estimate of $2,040 million.
Sales at the company’s beer business improved 11%, driven by 8.6% rise in shipment volume and depletions growth of 8.9%. Solid portfolio depletions and market share gains mainly stemmed from the strength in Modelo and Corona brand families.
During the reported quarter, the company witnessed significant momentum from the new product launches, including Corona Premier and Familiar. These brands, along with Modelo Especial, were among the top 5 share gainers in the beer market in the fiscal first quarter.
Wine and spirits segment’s sales declined 2.5% due to 2.9% fall in shipment volume and 3.6% lower depletions.
Adjusted gross profit improved 4% year over year to $1,040.2 million. Adjusted gross profit margin contracted 80 basis points (bps) to 51.2%.
Constellation Brands' comparable operating income declined 4% to $637.6 million, with comparable operating margin contracting 320 bps to 31.1%. The decline was due to higher marketing expenses for new product introductions, and increased transportation costs at both beer and wine segments
Operating margin for the beer segment declined 230 bps due to planned marketing expenses for the launch of Corona Premier and Corona Familiar alongside increased transportation and unfavorable currency. The wine and spirits segment reported operating margin contraction of 430 bps due to the higher cost of goods sold and increased marketing investments for key focus brands, and product innovations.
Constellation Brands ended the fiscal first quarter with cash and cash equivalents of $210 million. As of May 31, 2018, it had $9,416.4 million in long-term debt (excluding current maturities) and total shareholders’ equity of $10,565.8 million.
In first-quarter fiscal 2019, Constellation Brands generated $504 million in cash from operations and $335.8 million of free cash flow.
The company’s solid cash flow and financials provide it with the flexibility to pay dividends. Incidentally, on Jun 28, 2018, it announced a quarterly dividend of 74 cents per share for Class A and 67 cents for Class B shares. This dividend is payable on Aug 24 to shareholders with record as of Aug 10. Further, it repurchased 451,000 shares for $100 million in the fiscal first quarter.
Fiscal 2019 Outlook
Following the dismal fiscal first quarter, the company reiterated its adjusted earnings guidance for fiscal 2019 while it raised GAAP earnings view.
The company envisions adjusted earnings of $9.40-$9.70 per share for fiscal 2019. On a reported basis, EPS for fiscal 2019 is now anticipated to be $10.93-$11.23 compared with $9.38-$9.68 guided earlier.
Constellation Brands continues to expect net sales and operating income for the beer segment to grow 9-11%. Moreover, sales and operating income for the wine and spirits segment is likely to improve 2-4%.
Certain other factors were taken into consideration in providing the earnings guidance. These include an interest expense expectation of $355-$365 million, an approximate tax rate of 19% and weighted average diluted shares outstanding of approximately 197 million.
The company anticipates capital expenditure for fiscal 2019 to be $1.15-$1.25 billion, with roughly $900 million estimated for the expansion of Mexico beer operations.
The company’s free cash flow expectation for fiscal 2019 lies around $1.2-$1.3 billion. Operating cash flow is projected to be $2.35-$2.55 billion.
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Kirin Holdings has increased nearly 30.6% in the past year. The company has long-term earnings growth rate of 10%.
Turning Point Brands has rallied 108.3% in the past year. Additionally, the company has delivered positive earnings surprise of nearly 16.7% in the last reported quarter.
Medifast has surged 68.3% in the last three months. Moreover, the company has long-term earnings growth rate of 15%.
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