Constellation Brands (NYSE:STZ) has enjoyed a strong track record for buying premium alcoholic beverage franchises and boosting their value. The most consequential of these acquisitions was the 2012 purchase of imported Mexican beers including Corona and Modelo that sparked a five-year period of sharp sales and profit growth.
The company is taking a different approach to allocating capital as it enters 2019, choosing instead to pare back its portfolio by removing many of its wine and spirit brands. In a conference call with analysts, CEO Bill Newlands and his executive team explained why this sale fits with their broader strategic plans, and how it could lay the groundwork for improved results ahead. Let’s look at some investor highlights from that presentation.
Fixing the wine and spirits segment
Our remaining wine and spirits business will primarily consist of wines at the greater than $11 price point and will include fast-growing, high-margin power brands like Kim Crawford, the number one sauvignon blanc in the U.S.; Meiomi, the number one U.S. pinot noir; and SVEDKA Vodka, the number one imported vodka in the U.S. — Newlands
Far from exiting the wine and spirits business entirely, Constellation Brands’ $1.7 billion brand sale represents a shoring up of this segment, which has struggled to grow for over a year. In the past few quarters, executives blamed brands at lower-end price points for pressuring results, and those are the franchises that management chose to sell to E. & J. Gallo Winery.
The remaining portfolio will be smaller, executives said, but faster growing and more profitable. Specifically, Constellation Brands is predicting consistent market share gains and operating margin of around 30% after the sale closes, compared to the 26% level it achieved over the last year.
Beer remains a powerhouse
Constellation continues to be the cornerstone of growth in the U.S. beer industry, delivering 36 consecutive quarters of growth dating back to the beginning of fiscal 2011. High-end beer is driving virtually all the U.S. beer category growth. And our beer business is the leader in high-end beer. — Newlands
A strong fourth quarter capped another stellar year for the beer business as sales rose 9%, and average selling prices increased. Constellation Brands celebrated the successful launch of the low-calorie Corona Premier this past year, which helped the broader franchise reach over 150 million cases in sales volume.
Corona is now the top premium imported beer and is on pace to overtake Coors as the second largest beer franchise in the country overall, according to management. “There are very few industry segments where this level of growth has been sustained over this length of time,” Newlands said of the premium industry niche.
A transitional year ahead
I’m confident in the ability of our beer business to generate industry leading high single-digit growth trends for fiscal 2020 with the initiatives we already have under way for this year. [And] fiscal 2020 will be a dynamic year for our wine and spirits business. — Newlands
Constellation Brands is predicting another year of strong sales growth in the beer segment, although gains should slow to around 8% from 9.3% in fiscal 2019. The segment should become slightly less profitable, meanwhile, as extra marketing spending and rising input costs offset rising prices.
The wine segment will take a huge hit, given that the sold franchises accounted for $1.1 billion of sales and $389 million of gross profit last year. But management says they’re happy with the trade-off that will deliver improved profitability starting in late fiscal 2020, extra cash, and healthier demand profile. “This, along with the opportunities we plan to capture to increase our leadership position in high end beer,” CFO David Klein said, “has us very excited about the future.”