Constellation Brands Ups View on Q2 Earnings & Sales Beat

Keeping its trend of earnings beat alive for the fourth straight quarter, Constellation Brands Inc. STZ came up with stellar second-quarter fiscal 2016 results. The company's top and bottom lines exceeded estimates and improved year over year, thereby encouraging management to raise its outlook for the full fiscal.

Results were mainly backed by continued strength in the company's beer business, improving trends at its wine and spirits business and solid overall depletion trends.

Q2 Highlights

The company's adjusted earnings for the second quarter of fiscal 2016 jumped 41% year over year to $1.56 per share, cruising past the Zacks Consensus Estimate of $1.31.    
 
On a reported basis, the company registered earnings of $1.49 per share that surged 52% from the year-ago comparable quarter figure.

Net sales advanced nearly 8% to $1,733.4 million. On a currency adjusted basis, consolidated organic sales grew 9%. Moreover, the company's top line came ahead of the Zacks Consensus Estimate of $1,727 million.

The year-over-year increase in the top line is attributable to strong volumes at the beer business, which drove 14% growth in that segment. The segment also witnessed a 10% rise in depletions, backed by solid demand. Meanwhile, wine and spirits' sales improved 3% year over year, on a constant currency basis, mainly driven by greater spirits volume.

Also, the company closed the Meiomi brand acquisition in August and has successfully integrated its operations in Constellation Brands' wine portfolio.  

Cost and Margin Performance

Adjusted gross profit for the quarter rose 13.3% year over year to $790.3 million. Consequently, adjusted gross profit margin expanded 220 basis points (bps) to 45.6%.

Constellation Brands' adjusted operating income escalated 21.2% to $500.9 million, with the adjusted operating margin expanding 320 bps to 28.9%. This was backed by higher operating income at both, the beer, and wine and spirits businesses, which in turn gained from higher volume, effective pricing and lower cost of products sold. However, the wine and spirits business was partly impacted by adverse currency fluctuations.  

Financial Position

Constellation Brands ended the quarter with cash and cash equivalents of $329.7 million. As of Aug 31, 2015, the company had $7,238.2 million of long-term debt (excluding current maturities) and its total shareholders' equity was $6,165.0 million.

During the first half of fiscal 2016, Constellation Brands generated $803.1 million in cash from operations and free cash flow of $508 million.

On Oct 6, 2015, the company declared a quarterly cash dividend of 31 cents per share on Class A shares and 28 cents per share on Class B shares, payable on Nov 24, to shareholders on record as of Nov 9.

Fiscal 2016 Outlook

Following the spectacular first half, management raised its earnings outlook for fiscal 2016. Constellation Brands now envisions adjusted earnings in the range of $5.00–$5.20 per share, up from $4.80–$5.00 expected earlier.

On a reported basis, earnings per share in fiscal 2016 are now anticipated at $4.73– $4.93, higher than the previous guidance of $4.60–$4.80.  

The company still expects its beer segment's net sales for the fiscal to grow nearly 10%. Operating income at the beer business is now expected to increase 15–18% compared with a 13–15% rise projected earlier. Further, the company's wine and spirits' sales and operating income are still expected to grow in the low-to-mid single-digit range.

Certain factors were taken into consideration before providing the earnings guidance. These include an interest expense expectation of $310–$320 million, an approximate tax rate of 30.5% and weighted average diluted shares outstanding of approximately 204 million.

Moreover, Constellation Brands continues to expect capital expenditures in the band of $1.05–$1.15 billion for fiscal 2016. This is expected to include $950 million to $1.05 billion for the beer business.

However, the company raised its free cash flow expectations and now projects it at $200–$300 million, up from $100–$200 million expected earlier. Also, operating cash flow for the full fiscal is now anticipated in the range of $1.25–$1.45 billion compared with $1.15–$1.35 billion projected earlier.

Zacks Rank

Constellation Brands currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the beverages-alcohol industry are Castle Brands Inc. ROX and Truett-Hurst, Inc. THST with a Zacks Rank #2 (Buy). Another stock from the broader consumer staples sector – Diamond Foods, Inc. DMND with a Zacks Rank #2 – is also worth considering.

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