Constellation BrandsSTZ

Key highlights

• Profit outlook raised: The company increased its full year reported profit forecast to a range between $11.50 and $12.20 per share, up from the previous actual result of $9.61. Management also expects to generate between $1.6 billion and $1.7 billion in free cash flow, which is the cash left over after paying for operations and building new facilities.
• Beer demand softening: Beer depletions, a measure of how fast products are sold from distributors to retailers, fell 0.3% this quarter compared to a 0.6% gain in the previous period. The slip was driven by a 2% decline in Modelo Especial and a more than 5% drop in Corona Extra sales, even as newer brands like Pacifico grew 21%.
• Wine business rebounding: Organic wine and spirits sales grew 8% this quarter, a significant turnaround from the same time last year when the business was larger before selling off several brands. This growth was led by Kim Crawford wine and Mi Campo tequila, which saw sales to retailers rise 4% and 62% respectively.
• Beer margins holding: Operating margins for the beer business, which shows the profit kept from every dollar of sales, remained steady at 39.0%. This matches the 39.1% margin from a year ago as the company used higher prices to offset increased spending on marketing and higher costs for running its business.
• Cash returned to owners: Management returned over $400 million to shareholders during the quarter through a combination of dividends and buying back $324 million of its own stock. This is part of a plan to balance spending on its new brewery in Veracruz with direct payouts to investors.

Our take: This was a respectable quarter because the company managed to grow its bottom line even as its biggest beer brands showed some rare signs of slowing down. While the slight dip in beer sales is a watch point, the recovery in the wine division and the raised profit guidance suggest the business is navigating a picky consumer environment well. It reinforces the case for owning a leader with such strong pricing power.