Constellation Brands Inc. STZ started fiscal 2016 on a spectacular note, as the company’s first-quarter top- and bottom-line results exceeded expectations and improved year over year, thereby encouraging management to raise its outlook for the fiscal year.
Results were mainly backed by strength in the company’s beer business, improving trends at its wine business, solid sales and depletion volumes at its spirits business.
The company’s adjusted earnings for the first quarter of fiscal 2016 jumped 18% year over year to $1.26 per share, cruising much ahead of the Zacks Consensus Estimate of $1.22.
On a reported basis, the company registered earnings of $1.18 per share that rose 15% from the year-ago comparable quarter figure.
Net sales in the reported quarter advanced nearly 7% to $1,631.3 million from $1,526 million in the first quarter of fiscal 2015. On a currency adjusted basis, net sales rose 8% in the quarter. Moreover, the company’s top line came ahead of the Zacks Consensus Estimate of $1,615 million.
The year-over-year increase in the top line was attributable to strong volumes at the beer business, which drove 11% growth in that segment. Meanwhile, wine and spirits’ sales improved 4% year over year, on a constant currency basis, mainly backed by greater shipment volume and favorable mix.
Cost and Margin Performance
Adjusted gross profit for the quarter surged 10% year over year to $745.7 million. Consequently, adjusted gross profit margin expanded 130 basis points (bps) to 45.7%.
Constellation Brands' adjusted operating income escalated 12% to nearly $454.2 million, with the adjusted operating margin expanding 130 bps to 27.8%. This was primarily driven by higher operating income at the beer business, which in turn gained from higher volume and effective pricing.
Financial Position
Constellation Brands ended the quarter with cash and cash equivalents of $130.7 million. As of May 31, 2015, the company had $7,038.2 million of long-term debt (excluding current maturities) and its total shareholders’ equity stood at $6,051.9 million.
During the quarter, Constellation Brands generated $205.7 million of cash from operations and free cash flow of $76 million.
On Jun 30, 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 Aug 25, to shareholders on record as of Aug 11, 2015.
Other Developments
Concurrent with this press release, Constellation Brands announced plans to acquire the Meiomi wine brand for $315 million. The integration of Meiomi is likely to enhance Constellation Brands’ robust brand portfolio, given Meiomi’s high-growth, large-scale and high-margin business.
Also, the deal, which is expected to conclude at the beginning of August, is anticipated to augment fiscal 2016 earnings per share by 3–4 cents.
Fiscal 2016 Outlook
Following the spectacular start to the year, management raised its earnings outlook for fiscal 2016. Constellation Brands now envisions adjusted earnings in the range of $4.80–$5.00 per share, up from $4.70–$4.90 expected earlier.
On a reported basis, earnings per share in fiscal 2016 are now anticipated to range from $4.60–$4.80, higher than the previous guidance range of $4.55–$4.75.
The company expects its beer segment’s net sales for the fiscal to grow nearly 10%, with mid-to-high single-digit volume growth. Operating income at the beer business is expected to increase 13%–15%, compared with a 10%–12% rise projected earlier. On the other hand, the company’s wine and spirits business’ 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, such as an interest expense expectation in the range of $325–$335 million, an approximate tax rate of 30.5% and weighted average diluted shares outstanding of approximately 204 million.
Moreover, the company continues to expect capital expenditures in the range of $1.05–$1.15 billion for fiscal 2016. This is expected to include $950 million to $1.05 billion for the beer business. Further, the company still hopes to generate free cash flow in the range of $100–$200 million. Also, the company maintains its operating cash flow projection in the range of $1.15–$1.35 billion.
Zacks Rank
Constellation Brands currently carries a Zacks Rank #2 (Buy). Other well-ranked stocks in the related beverages-alcohol industry include Ambev S.A. ABEV, Anheuser-Busch InBev SA/NV BUD and Brown-Forman Corp. BF.B, each carrying a Zacks Rank #2.
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