Constellation Brands (STZ) continued its growth story in the fiscal first quarter of 2020. Sales across their beer and wine brands were robust, while the company experienced a loss on earnings related to its equity stake in Canadian cannabis. I expect this to remain a rather volatile factor for Constellation Brands, as the road to profitability for its investment in Canopy Growth (CGC) seems a bit windy. That said, the endgame might justify the short term. With an updated outlook for fiscal 2020 guidance, Constellation Brands is getting attention today.
Beating expectations, Constellation Brands' reported sales growth of 2% to $2.097 billion. While not necessarily robust, the sales increase was what was needed. Beer shipment volumes increased 5.45%, while depletions increased 6.6%. Overall net sales of beer increased 7.4% to $1.47 billion. Operating income improved a solid 11.7% to $580.6 million. Constellation Brands noted that the growth was driven by Modelo Especial, which had a depletion rate of 17%, while Corona Premier posted double digit depletion growth. Overall, STZ expects the beer side of the business to grow 7%-9% in net sales in fiscal 2020.
On the wine and spirits side, there are two stories being told. The company is in the process of revamping and reinvigorating this side of the business. Overall shipment volumes decreased 8.1%, while depletions decreased 0.7%. Net sales of $619.8 million marked a 7.8% decline year over year. Subsequent operating income declined 4.2%. It's a fascinating turn, as a few years ago all the discussion was on spirits and wine overtaking beer's momentum.
Constellation Brand's announced the sale of underperforming wine/spirits assets in their previous quarter. The transaction is expected to finish in the second quarter, and should substantially alter the metrics here. The company expects net sales in wine and spirits to decline by 20%-25% in fiscal 2020 due to the transaction. Overall, this might turn out to be a good move. Constellation can focus its attention on the brands that are doing well, rather than spending money on weak initiatives. Operating margins increased 90 basis points in the first quarter, bringing margins to 25.9% within wine and spirits. The company credited pricing and lower marketing costs. Within the segment, their focus on "power brands" produced 4% depletion growth amongst that portfolio. These names include Kim Crawford, Meiomi, and The Prisoner. Svedka liquors also performed well with 6% depletion growth.
The area that might have investors spooked was net earnings. The company reported a loss of $1.30 per diluted share, thanks to equity losses in Canopy Growth. If you exclude Canopy Growth from the equation, Constellation brands reported diluted earnings of $2.40 per diluted share. Overall, shareholders of Constellation probably need to get used to the potential for volatile earnings reporting, as Canopy Growth's stock seems a bit shaky in the aftermath of continued losses. It's a long term project that will take some time.
Looking ahead, Constellation provided improved guidance for fiscal 2020. Constellation Brand's anticipates earnings of $4.95-$5.25 on a reported basis. That would mark a fairly steep decline from fiscal 2019's $17.57. But we must remember that this included acquisitions. On a comparable basis, (that also excludes Canopy Growth), earnings are expected to come in at $8.65-$8.95 vs. fiscal 2019 (excluding Canopy) earnings of $9.34. Overall, we are looking at some year over year weakness. Nonetheless, these earnings were above previous expectations, and the stock is reacting favorably. Having given up about 10% from its June 2018 highs in the $230 range, STZ has maintained a relatively fair valuation.
Currently trading at $198 (at the time of writing), the stock is trading at around 23x the low range of their fiscal 2020 forward earnings guidance.
Overall, Constellation's success remains dependent on beer. It is by far their largest source of revenue, and will be what carries the company thru as they attempt to "transform" their wine and spirits business to the "high end", as well as develop the activities of Canopy Growth, which promises cannabis-infused drinks.