Constellation Brands, Inc. STZ has reported second-quarter fiscal 2025 results, wherein the bottom line beat the Zacks Consensus Estimate but sales marginally missed the consensus mark. The company’s sales and earnings improved year over year. Results primarily benefited from the continued strong performance of the beer business and an improved operating margin, offset by a decline in the wine and spirits business.

Comparable earnings per share (EPS) of $4.32 improved 14% year over year in the fiscal second quarter and beat the Zacks Consensus Estimate of $4.11. On a reported basis, the company incurred a loss per share of $6.59 against an EPS of $3.74 in the year-ago quarter. The company’s reported EPS included a non-cash goodwill impairment loss of $2.25 billion for the wine and spirits business.

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Net sales increased 3% year over year to $2.92 billion but missed the Zacks Consensus Estimate of $2.95 billion. Sales growth was driven by continued strength in the beer business on solid volume growth and strong demand across most of its portfolio.

Shares of this Zacks Rank #3 (Hold) company have risen 2.1% in the past three months compared with the industry’s growth of 10.4%.

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A Look at STZ’s Q2 Performance Details

Constellation Brands' sales for the beer business advanced 6% year over year to $2.5 billion, backed by a 4.6% increase in shipment volumes and 2.4% depletion volume growth. Depletion volumes were aided by robust demand for most of its brand portfolio, led by strength in the Modelo Especial, Pacifico and Modelo Chelada brands.

The depletion volume increased 5% year over year for Modelo Especial, 23% for Pacifico and 2% for Modelo Chelada. However, depletions declined 3% for Corona Extra.

Sales in the wine and spirits segment dipped 12% to $388.7 million in the fiscal second quarter. Sales were affected by a 9.8% decrease in shipment volumes and a 17.6% fall in depletions. The soft volumes mainly stemmed from challenging market conditions, particularly in the U.S. wholesale channel for most price segments in the wine category.

Constellation Brands Inc Price, Consensus and EPS Surprise

Constellation Brands Inc price-consensus-eps-surprise-chart | Constellation Brands Inc Quote

A Peek Into Constellation Brands’ Margins

STZ's comparable operating income was $1.09 billion, up 13% from the prior-year quarter. The rise was driven by robust operating income in the beer business, offset by a decline in the wine and spirits segment.

Operating income for the beer segment improved 13% year over year to $1.08 billion. The operating margin for the beer segment expanded 270 bps to 42.6% due to fixed cost absorption led by volume growth, gains from ongoing cost-saving initiatives, favorable pricing and the absence of voluntary keg recall costs from second-quarter fiscal 2024. This was partly negated by higher marketing costs.

Operating income for the wine and spirits segment declined 13% year over year to $70.5 million. The segment’s operating margin was relatively flat at 18%, as gains from lower SG&A and contractual distributor payments were offset by product mix changes and lower volumes.

STZ’s Financial Position Seems Strong

As of Aug. 31, 2024, Constellation Brands’ cash and cash equivalents were $64.4 million, long-term debt (excluding current maturities) was $10.7 billion, and total shareholders’ equity (excluding non-controlling interest) was $7.9 billion. The company generated an operating cash flow of $1.9 billion and an adjusted free cash flow of $1.2 billion for the six months ended Aug. 31, 2024.

STZ’s board announced a quarterly dividend of $1.01 per share for Class A shares on Oct. 1, 2024. The dividend is payable Nov. 21 to its shareholders of record as of Nov. 5.

Constellation Brands’ FY25 Expectations

The company revised its reported EPS outlook for fiscal 2025. Management anticipates an enterprise net sales increase of 4-6% for fiscal 2025, with 6-8% sales growth for the beer segment. However, sales for the wine and spirits segment are expected to decline 4-6%.

STZ anticipates enterprise operating income on a reported basis to decline 62-63% for fiscal 2025, while the comparable operating income is expected to improve 8-9%. The company expects operating income to improve 11-12% for the beer segment, and decline 16-18% for the wine and spirits segment. Corporate expenses are expected to be $260 million for fiscal 2025.

The company reiterated its recently revised comparable EPS guidance of $13.60-$13.80 per share for fiscal 2025. Its comparable EPS view includes $449 million of shares repurchased through August 2024. It narrowed its reported fiscal 2025 EPS view to $4.05-$4.25 from the $3.05-$7.92 mentioned earlier. It recorded a comparable EPS of $12.38 and a reported EPS of $9.39 in fiscal 2024.

Constellation Brands predicts interest expenses of $430 million for fiscal 2025. It anticipates a reported tax rate of 9% and a comparable tax rate of 18.5% for fiscal 2025. The company expects shares outstanding to be 183 million at the end of fiscal 2025, inclusive of share repurchases.

Constellation Brands reaffirmed its forecast for the operating cash flow of $2.8-$3 billion for fiscal 2025. It expects a free cash flow of $1.4-$1.5 billion. STZ plans to incur a capital expenditure of $1.4-$1.5 billion in fiscal 2025.

Stocks to Consider

We have highlighted three better-ranked stocks from the Consumer Staple sector, namely Diageo DEO, The Boston Beer Company SAM, and The Coca-Cola Company KO.

Diageo is involved in producing, distilling, brewing, bottling, packaging and distributing spirits, wine and beer. DEO carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The consensus estimate for Diageo’s current financial year’s earnings per share indicates growth of 1.2% from the year-ago reported figures. The consensus sales estimate suggests a year-over-year decline of 5.2%.

Boston Beer is one of the largest craft brewers in the United States. SAM currently has a Zacks Rank #2. It has a trailing four-quarter earnings surprise of 155.1%, on average.

The Zacks Consensus Estimate for SAM’s current financial-year sales and earnings suggests growth of 0.6% and 34.6%, respectively, from the year-ago reported figures.

Coca-Cola, a leading non-alcoholic beverage company, currently carries a Zacks Rank #2. KO has a trailing four-quarter earnings surprise of 4.7%, on average.

The Zacks Consensus Estimate for KO’s current financial-year sales and earnings indicates growth of 0.6% and 6%, respectively, from the year-earlier actuals.

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The Boston Beer Company, Inc. (SAM) : Free Stock Analysis Report

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