Will Constellation Brands disappoint investors on Thursday?

Constellation Brands ( STZ -0.73% ) has big questions for investors to answer in a few days. The liquor giant, which owns popular imported beer brands like Corona and Modelo, has been tracking the market over the past year. Wall Street has been disappointed by the slow progress of Constellation’s rebound plan for the wine and spirits portion of its business. Shareholders are also concerned about weak demand in the hard seltzer niche.

Constellation Brands will likely have a mix of good and bad news to report on these topics for the sales period that ended in early 2022. Let’s take a closer look at what to expect from the results, due Thursday, April 7, and how the stock could start offering better returns from here.

Image source: Getty Images.

sales trends

Questions about growth abound before the announcement. Constellation brands showed solid strength in parts of its portfolio in early January. But there were also warning signs, including lower demand for Corona hard seltzer and shrinking sales in the wine and spirits segment.

On Thursday, investors will want to see progress on management’s turnaround plan for this wine and spirits division, which will ideally return to growth in 2022. For context, it was down 7% last quarter.

Meanwhile, look for Constellation Brands to report poor sales, and potentially write-offs, around its hard seltzer products, given that its rival boston beer recently described the slowdown in sales in this area. Constellation is not as exposed to the niche, so its overall beer volumes have likely continued to grow.

Margin pressures

There is no shortage of potential bad news that management can cite to explain weaker profitability this quarter. In addition to the depreciation associated with the drop in demand for seltzer water, costs have increased for materials such as glass and aluminum, as well as for labor and transportation.

CEO Bill Newlands and his team might mention these challenges, which won’t be fully offset by price increases until mid-2022.

STZ Gross Profit Margin Chart

STZ Gross Profit Margin Data by YCharts

Track gross profit margin to prove that Constellation Brands is finding ways to cut costs and raise prices through innovation, just like PepsiCo in recent months. Investors also hope the wine and spirits segment will start contributing to earnings growth this year after management spent nearly two years restructuring the division.

Look forward

Investors’ attention will focus primarily on management’s updated outlook for 2022. Heading into the report, Constellation Brands is targeting a solid 11% increase in its beer business as profitability declines slightly. The wine and spirits segment should take a big step towards a return to growth as margins improve.

The stock’s weak performance so far in 2022 suggests that Wall Street is expecting bad news on the earnings front thanks to the combination of rising costs and amortizations related to seltzer water niches. and recreational marijuana.

These challenges are all temporary, which means investors may want to put Constellation Brands on their watchlists. Its diversified portfolio of premium alcoholic beverages should support improving sales and profitability, just as it did for several years before the pandemic.

These returns are expected to be magnified over time as management’s biggest bets, such as modernizing the Mexican brewery network and investing in canopy growthpay all the way.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

Comments are closed.