Constellation Brands Explains Why Rising Costs Are Hurting Profits Today

Alcoholic-beverage giant Constellation Brands (NYSE: STZ) posted first-quarter earnings results last week that delivered mostly positive news to shareholders. The owner of the popular Corona and Modelo beer franchises met management's overall forecasts and stayed on pace to reach its fiscal 2019 sales and earnings targets.

Yet there was a lot more to this report than those top- and bottom-line figures, since Constellation is engaged in several projects aimed at spurring faster long-term growth at the expense of short-term profits.

Executives updated investors on that trade-off in a conference call with Wall Street analysts. Below, I've picked out a few of the highlights from that presentation.

Adding to the portfolio

Constellation's beer portfolio didn't miss a beat this quarter, with depletion, a metric measuring consumption, rising 9%. The national rollout of two new Corona brands is off to a good start, executives said, and the company stole more market share during the Cinco de Mayo and Memorial Day holidays with strong demand for Corona, Modelo, and Pacifico beers.

About those rising costs

The profitability of the beer business took a rare step backward, with margins dropping from 40% of sales to 38% of sales. Pricing trends continued improving, but that benefit was overwhelmed by higher spending. Marketing costs leapt to 11% of sales from 10% a year ago as Constellation shelled out cash to support the Corona releases and aggressive advertising around the Modelo and Pacifico brands. Executives said strengthening the brand is key to protecting its positive sales momentum.

Making bold moves

Constellation Brands booked another significant financial gain from its investment in Canopy Growth, the cannabis producer that's giving it early access to what could become a large global market for cannabis-infused drinks.

But management's capital spending plans go much further: Constellation is expecting to invest almost $900 million in upgrading and expanding its Mexican beer brewery network this year while continuing to hunt for new beer, wine, and spirits brands to add to its premium-focused portfolio.

Looking ahead

Considering that the company has been boosting earnings at a 20% clip for the past five years, it was jarring for some investors to see profits decline in the first quarter. Management expects cost to rise at an even faster pace in the second quarter, too, due mainly to the cadence of advertising spending and new-product releases.

However, Sands and his executive team believe that the second half of the fiscal year will bring more profitable growth such that they'll meet their initial goals of roughly 10% sales and profit gains for the beer business and 3% growth in wine and spirits. These figures should translate into a 10% earnings expansion that, while below the company's prior 20% pace, is still far higher than the rate industry peers are achieving right now.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.