Constellation Brands Inc.’s stock slid 9% Thursday — its biggest one-day decline since a drop of 11.8% on March 23, 2020, at the start of the pandemic — after the company reported earnings for its fiscal third quarter. Analysts’ focus on weakness in beer sales dominated the company’s earnings call.
The company’s beer depletions, a metric that measures the number of cases sold by distributors to retailers, was 5.7% in the quarter, down from 8% to 9% in the past four quarters.
Depletions for the company’s Modelo Especial brand were just 4%, compared with 10% in the second quarter.
“The multiple commanded by Constellation
is heavily dependent on the reliability of Modelo’s nearly double-digit growth profile,” wrote MKM analyst Bill Kirk in a note to clients.
Kirk was expecting beer depletions of 8%.
“With another quarter of muted beer performance expected in the fourth quarter, we think investors are better served monitoring Modelo than stepping in and owning the equity,” he wrote. Kirk rates Constellation stock as neutral with a fair-value estimate of $238, which is about 12% above the stock’s current price.
On a call with analysts, Chief Executive Bill Newlands acknowledged a “series of headwinds” that developed in the latter part of the quarter. Those included higher price increases than usual at the company in response to cost pressures across its supply chain. Other parties in the distribution chain also raised prices, he said.
“Historically, the impact of these types of notable pricing actions takes a few months to settle in,” he said, according to a FactSet transcript.
The company also saw weaker demand in California, where it was lapping double-digit depletion rates from the year-earlier quarter that resulted from better weather in November 2021 and better economic conditions.
Given persistent inflation, Newlands said he does not expect to achieve Constellation’s medium-term target margins for the beer business of 39% to 40% for fiscal 2022.
The company is still facing higher costs for everything from raw materials, including wood pallets and steel, to packaging, fuel, freight and marketing, said Chief Financial Officer Garth Hankinson.
The company manages its hedging program on a multiyear rolling basis, which means it will not capture the benefit of declines in certain commodity prices until the second half of fiscal 2023, Hankinson said.
“In addition, while prices have declined from their peaks earlier this year for commodities like aluminum and natural gas, which are part of our can and glass costs, they still remain above prepandemic levels,” he said.
Constellation posted third-quarter net income of $467.7 million, or $2.52 a share, for the quarter to Nov. 30, compared with $470.8 million, or $2.48 a share, in the year-ago quarter. Adjusted profit at the spirits maker was $2.83 a share, while earnings per share, excluding losses from the company’s stake in troubled Canadian cannabis company Canopy Growth Corp.
came to $3.01. The FactSet consensus was for EPS of $2.89.
Revenue rose to $2.44 billion from $2.32 billion, ahead of the FactSet consensus of $2.39 billion.
Looking ahead, Constellation Brands expects full-year earnings of 15 cents to 35 cents a share, or adjusted profit of $11 to $11.20 a share, excluding Canopy.