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Constellation Brands Still Believes in Hard Seltzer

Last Thursday, the New York-based Fortune 500 international beverage alcohol company lifted its fiscal 2022 earnings per share guidance as Constellation Brands Inc (NYSE: STZ) officially left behind its disappointing fiscal second-quarter earnings.

Third Quarter Figures

For the quarter that ended on August 31st, revenue exceeded projections as it amounted to  $2.4 billion, which translates to approximately 5% growth to the prior year’s figure. However, earnings came below estimates of $2.77 as the parent company of Corona and Modelo earned an adjusted $2.38 per share due to a $66 million obsolescence charge caused by excess hard seltzer inventory. However, the company’s revenue grew about 5% from a year ago, beating the consensus estimates of $2.30 billion.

The Hard Seltzer Headache

Constellation Brands launched its Corona Hard Seltzer last year. Last Wednesday, CEO Bill Newlands acknowledged the once-sizzling category has cooled off in recent months and may stay that way, but he still sees growth opportunities there. Newlands also confirmed that relative deceleration in hard seltzer sales played a big part in the company missing per-share earnings estimates in its latest reported quarter.

But peers have also been reporting slumping demand on this front that has been driving most of the industry’s gains with the Boston Beer Company Inc (NYSE: SAM) not only reporting weaker-than-expected quarterly results in July due to weak sales of its Truly hard seltzer brand but also lowering before entirely withdrawing its 2021 outlook.

Constellation Managed to Offset the Declines

Growth is coming from Constellation’s core beer brands, especially Modelo which is why the company didn’t see a real impact from the slowdown as sales trends held up in the high single-digit range for several quarters now with Modelo and Corona Extra wins completely offsetting declines from the Corona Hard Seltzer headache. Stability is what made Constellation stand out from rivals.

Hard Seltzer Isn’t Dead

But management is still targeting growth in hard seltzer despite volatile results expected over the next few quarters as it predicts smaller competitors will stumble. Management is expecting a shakeout period as dozens of smaller competitors fall off of retailers due to not having enough demand to sustain the space.

Inventory Issues Are About to Be Solved

As expected, even Constellation Brands isn’t immune to the supply chain disruptions with low in-stock levels during the latest reported quarter and rising costs for materials like aluminum, fuel, and glass, all of which contributed to a 5 percentage-point decline in the profitability of the beer segment.

Although inventory issues are expected to be solved gradually over the next six months, the cost issues are expected to linger a bit longer, with earnings being additionally pressured by additional spending on the Mexican brewery network.

The Essence Remains as Healthy as Ever

Constellation’s main growth source is its beer portfolio which is as healthy as ever Moreover, undergoing investments are setting up the base for rising margins in the wine and spirits business and in the beer segment which is a good introduction for the final quarter of 2021.

In a Nutshell- Constellation is Making the Best of A Challenging Situation

The alcoholic beverage giant recently revealed its summer growth has enjoyed solid sales growth despite rising costs and supply chain challenges, resulting in the company raising its short-term sales outlook even though demand is slumping in the hard seltzer niche, which had been an attractive growth target until just recently. CEO Bill Newlands and his team elaborately explained why that disruption isn’t getting in the way of Constellation Brands’ wider ambitions for the business in 2021 and beyond.

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