Constellation Brands (STZ) earnings summary Q1 FY22

Key takeaways:

Current Price: $235 Price Target: $255

Position Size: 2.48% 1-Year Performance: +32%

Total company sales +14%, with market share gains during Cinco de Mayo & Memorial Day, and Hard Seltzer gained shelf space

Beer sales increased by 14% (volume +10.7%)
Supply shortage (driven by high consumer demand, weather and delay in Obregon coming online) impacted growth – shipments would have been in the high teens vs. +11%. This pressure should ease as the new Obregon facility fully ramps up in the coming months
On-premise reopening (bars, restaurants) is a positive with +250% growth y/y. 11% of beer volume was sold on-premise, still below pre-covid levels of 15%
June depletions are up High-single-digits, showing continued good momentum
Wine & spirits grew +16% organically, driven by high end portfolio

Inflation: cost inflation in the low-to-mid-single digits due to labor tightness (including truck drivers), commodity costs (aluminum and glass). Those headwinds are expected to be temporary
Beer operating margin grew 16%

Gross margin expanded 124bps, total operating margin +107bps. Higher pricing and SG&A expenses management helped offset higher input costs and marketing expenses

Guidance for fiscal year 2022 EPS increased by $0.05, thanks to lower share count

Beer net sales remain +7% to +9%, and operating income growth of +3-5%
Wine & Spirits to decline -22% to -24% (due to sale of business). Excluding divestment, sales would be +2% to +4%

Share repurchase was 2.2M during the quarter. Accelerated share repurchase program of $1B for FY22 ($523M done this quarter already)
CEO quotes:

“We’re very enthused by how June is setting up and is certainly consistent with our long-term algorithm”
“Due to benefits from our commodity hedging program, we did not experience the expected cost inflationary pressures during this quarter. However, we expect significant inflation headwinds to ramp up during the second half of our fiscal year as current hedges roll off. In addition, we believe the depth and duration of inflationary pressures are becoming more uncertain as the year unfolds”
“Our outlook as well as sort of the external advice we get on this is still that inflation is going to have a bit of a spike but it’s going to be temporary in nature. The question just is like how temporary”

Overall we still see long-term opportunity for growth in this name (including cannabis), and believe it is a good name to hold in staples.

Investment Thesis:

STZ helps position our portfolio to be more defensive at this stage of the economic cycle
Management team focused on high quality brands and innovation
STZ continues to have HSD top line growth and high margins that should incrementally improve going forward
STZ comes out of a heavy capex investment cycle to support its growth: FCF margins are set to inflect thanks to lower capex
Growth optionality from cannabis investment

[tag STZ] [category earnings]

$STZ.US

Julie S. Praline

Director, Equity Analyst

Direct: 617.226.0025

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109