Constellation Brands Inc. (STZ - Free Report) delivered stellar second-quarter fiscal 2019 results, wherein the top and bottom line surpassed estimates and improved year over year. Also, the company’s earnings reverted to its 14-straight quarters of positive streak after a miss in the previous quarter, with third positive sales surprise. As a result, management raised its earnings guidance for fiscal 2019.
Following the earnings release, shares of Constellation Brands increased 4.4% in the pre-market trading session. However, this Zacks Rank #5 (Strong Sell) stock has lost 2.3% in the past three months, narrower than the industry’s 6.4% decline.
The company’s adjusted earnings for second-quarter fiscal 2019 increased 16% year over year to $2.87 per share and outpaced the Zacks Consensus Estimate of $2.58. Moreover, reported earnings were $5.87 per share, up 136% year over year.
Net sales improved 10.1% to $2,299.1 million and came above the Zacks Consensus Estimate of $2,248 million.
At the company’s beer business, sales improved 10.5% driven by an 8.7% rise in shipment volume and depletions growth of 10.1%. 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. Notably, the company’s beer business was the top share gainer in the U.S. beer market in the fiscal second quarter, courtesy of gains from Corona and Modelo Especial’s brands.
Further, wine and spirits segment’s sales were up 9.3% owing to 8.8% growth in shipment volume and 0.2% rise in depletions.
Adjusted gross profit improved 10.8% year over year to $1,180 million. Also, adjusted gross profit margin expanded 30 basis points (bps) to 51.3%.
Constellation Brands' comparable operating income grew 9.5% to $780.7 million, while comparable operating margin contracted 20 bps to 34%. The decline was due to higher transportation costs coupled with increased marketing expenses at both the beer and wine segments.
Operating margin at the beer segment grew 10 bps as gains from higher pricing and robust operational performance were compensated by increased transportation expenses and marketing investments. However, the wine and spirits segment recorded operating margin contraction of 20 bps due to higher cost of goods sold and increased marketing investments, somewhat mitigated by favorable pricing and lower SG&A expenses.
Constellation Brands ended the fiscal second quarter with cash and cash equivalents of $206.1 million. As of Aug 31, 2018, it had $9,187.6 million in long-term debt (excluding current maturities) and total shareholders’ equity of $11,535.2 million.
In the first six months of fiscal 2019, Constellation Brands generated $1,338.5 million in cash from operations and $967.9 million of free cash flow.
The company’s solid cash flow and financials provide it with the flexibility to pay dividends. Incidentally, on Oct 3, 2018, it announced a quarterly dividend of 74 cents per share for Class A and 67 cents for Class B stock. This dividend is payable Nov 20, 2018, to shareholders of record as of Nov 6. Further, it repurchased 1.9 million shares for $404 million in the fiscal second quarter and 2.4 million shares for $504 million in the first half of fiscal 2019.
Recently, Constellation Brands announced that it will buy additional 104.5 million shares of Canopy Growth for C$48.60 per share, expanding its stake in the marijuana company to 38% from the initial 9.9% acquired in November 2017. This will mean an investment of nearly $5 billion (C$4 billion) in the Cannabis producer.
The transaction, which is expected to be funded by debt, will close by the end of October. Management anticipates interest expenses related to the transaction to be roughly $60 million before tax. Further, the transaction is expected to impact fiscal 2019 adjusted earnings by 25-30 cents per share.
Fiscal 2019 Outlook
Following the impressive quarterly results, the company raised its adjusted and GAAP earnings view for fiscal 2019, and reiterated other forecasts.
For fiscal 2019, the company envisions adjusted earnings per share of $9.60-$9.75, up from the $9.40-$9.70 range, guided earlier. On a reported basis, EPS for the fiscal year is now anticipated to be $14.10-$14.25, up from the $10.93-$11.23 projected earlier.
Constellation Brands continues anticipating 9-11% growth in net sales and operating income at the beer segment. 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 $335-$345 million, an approximate tax rate of 18% and weighted average diluted shares outstanding of approximately 196 million.
The company anticipates capital expenditures for fiscal 2019 to be in the band of $1.15-$1.25 billion, with roughly $900 million estimated due to 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 in the range of $2.35-$2.55 billion.
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