Victor, NY. Constellation Brands said reported third-quarter sales declined 5% to $2.32bn, yet the company reported better-than-expected organic sales and earnings in third-quarter fiscal 2022. Constellation Brands posted fiscal third-quarter comparable earnings of $3.12 per share, which rose 1% year over year and surpassed consensus analyst expectations (Zachs) of $2.70.
Organic sales were up 4% year over year and benefited from continued growth in the beer business and robust consumer demand. Despite difficult year-over-year volume comparisons, Constellation’s beer business posted depletion growth of more than 8%, driven by the continued strength of Modelo Especial and explosive growth from Corona Extra. Modelo Especial achieved 13% depletion growth, while Corona Extra reported depletion growth of 11%.
Constellation brands beer operating margin decreased 130 basis points versus the prior year to 41.3%. Benefits from favourable pricing and marketing planning were more than offset by rising costs (COGS).
The increase in costs was driven by several headwinds that included: increased material costs due to rising commodity prices and inflation that on average are in the mid to high single-digit range predominantly driven by wood pallets, aluminium, steel and cartons.
The company plans to take price increases within its beer portfolio slightly above its typical 1% to 2% range. CFO Garth Hankinson explained in an analyst call that this is a delicate balancing act: “We have to make sure that we’re balancing the right level of price increases with what’s going on with our consumer. We have a consumer set that skews a bit more Hispanic than some of our competitors, and in times of economic downturn, they tend to get hit a little bit harder (to take price) and they recover a little bit slower, so we want to make sure we’re not leaving any pricing on the table. We want to take as much as we can, but we also don’t want to take so much pricing that we impair the performance of our brands.
“[The price increases are not] likely not to cover all of our inflationary headwinds next year, but just like we did this year, we’re going to look at this on a market-by-market basis, brand by brand basis and we’ll take as much pricing as we think the consumer can absorb.”
Constellation now expects the beer business to 10-11% net sales growth and 6-7% operating income growth for fiscal 2022 reflecting the strong performance of the core beer portfolio.
The wine and spirits business delivered strong margin expansion while achieving solid 3% organic net sales growth to $568 for the third quarter. The Prisoner Brand Family, Kim Crawford, and Meiomi continued to outpace their respective price segments while contributing to Constellation share gains in the high-end of the U.S. wine market
Operating margin increased 140 basis points to 25.4% mix benefits from divestitures, and favourable prices were partially offset by increased marketing costs. The company forecasts organic net sales growth 4-6% for the full year.
As with beer, Constellation said its wine and spirits business was being hit by significant cost increases for the business including supply chain disruptions, inflationary cost pressures on product, freight, and warehousing costs. To mitigate some of these cost headwinds, it intends to take incremental price that will be staggered throughout the first half of calendar 2022.
[] Constellation also detailed its plans to invest in the next increment of capacity in Mexico to support the expected future growth of its Mexican beer portfolio. Total capital expenditures for the Beer Business are now expected to be $5bn to $5.5bn over fiscal 2023 to fiscal 2026. The investment will support an additional 25m to 30m hl of total capacity and includes the construction of a new brewery in Southeast Mexico in the state of Veracruz, as well as continued expansion and optimization at the company’s existing sites in Nava and Obregon.
