As Corona Ceases Production, Constellation Brands Reports Strong FY2020, Solid Alcohol Sales and Positive Outlook

Constellation Brands, Inc
STZ
(NYSE: STZ) has
reported strong results for Q4 and fiscal year 2020, with the alcohol beverage giant reported solid earnings and higher-than-expected profits and sales.

Despite this, the company has pulled its fiscal year 2021 guidance, citing the uncertainty surrounding coronavirus as the cause.

This news comes just hours after the news that Corona will cease production, deemed an unessential business by the Mexican government.

Constellation Brands, handling the US distribution of the beer, has assured they have 70 days worth of inventory. Despite the name affiliation between Corona and coronavirus, Corona has continued to be a top seller for Constellation Brands.

The results were announced via conference call lead by Constellation Brands president and chief executive officer Bill Newlands and chief financial officer Garth Hankinson.

“We’ve seen strong performance in FY2020, led by our beer business that generated double-digit operating income for the year,” says Newlands on the conference call.

He credits Constellation’s high-end power brands and successful new products as the cause of the success, as well as the continued demand for Corona and Modelo—beer sales grew 9% year-over-year. He expects this momentum to continue into the early stages of fiscal 2021.

Hankinson noted that Constellation beat expected earnings by 6%, excluding Canopy Growth Co. The company saw a net income of $398.4 million ($2.04 a share) in the fourth quarter, down from $1,,239.5 billion ($5.87 a share) the prior year. Operating cash flow set records, at $2.6 billion.

The company is also looking towards the upcoming finalization of the Gallo sale, where Constellation brands divested 30 of its lower-market wine brands to the California-based E & J. Gallo. Newland said the company expects to receive $850 million in cash from the deal. 

How is Constellation Brands faring in the midst of the outbreak?

“I remain extremely optimistic about the long term prospects for our business,” said Newlands. He noted that 85% of brands in the Constellation’s portfolio rely on off-premise sales, not on-premise, though he states he pandemic has forced the company to face “an increasing challenge operating environment and rapidly changing market condition”

In the weeks leading up to March 22, retail sales soared, with beer sales up 24% and wine and spirits up 23%. The company is keeping production facilities operational and teams are operating with increased security measures. 

To offset possible closures and shortages, Constellation has stocked roughly 70 days through the system, not including retailers. “We are fairly confident we will see no disruption at retail and will be able to meet consumer demands as they continue,” says Newlands. 

Newlands states that Constellation Brand’s success in the unprecedented times are because of the company’s ability to pivot. While on-premise sales have stuttered, “We are focused on the channels the consumer is choosing, namely, three-tier e-commerce, direct to consumer and off-premise, especially big-box grocery and club channels, where we are working diligently to ensure high in-stock positions for our key SKUs.” 

They have also adjusted marketing approaches, focusing instead on digital and social media platforms as sporting events and other marketing opportunities are canceled and postponed. 

To weather the pandemic, the alcohol giant is placing its bets on its key brands with household name recognition. “Let’s take our Woodbridge wine brand, for example,” explains Newlands. “We have seen significant pick up in the month of March for that brand—it’s a tried and true brand. People know it, and they appreciate the brand’s price-value relationship.”

Constellation has seen an uptick against the brand, as consumers reach for brands they know and appreciate. “There’s a little less experimentation across a recessionary period and our brands are well-positioned for this.”

Constellation’s wine & spirits sector “closed down fiscal 20 in a position of strength,” according to Newlands. Prisoner family of wines has found success, as has ‘convenience’ wine, like Kim Crawford’s canned wine. (Constellation will welcome upcoming line RTD extensions for Ruffino and High West Whiskey in FY2021.)

Constellation will also focus on the barrel-aged wine trend—since launching barrel-aged two years ago via Woodbridge and Cooper & Thief, the brand has sold 2 million cases. 

Corona in the Time of Coronavirus

Corona has suffered unique hurdles in the wake of the pandemic. Google searches for ‘beer virus’ and ‘Coronavirus’ have risen dramatically, as drinkers ponder whether the virus and the brand are connected. (There is no connection between the beer and the virus, obviously.) 

Constellation Brands urges that Corona’s distribution continues to grow double digits, and brand equity for Corona Extra remains extremely strong. “We remain bullish on Corona Extra’s future potential,” says Newlands. 

Over FY2021, Constellation Brands will lean on Corona’s hard seltzer offerings as the category continues to boom. 

Rough Waters in Mexican Beer Country

While Newlands has a promising outlook for Constellation’s Mexican beer portfolio, which includes Modelo, Corona and Pacifico, the state of affairs South of the Border is rocky.

As of April 3, Mexico has suspended beer production, deeming it an inessential activity. With the closures comes the suspension of Corona exports to 180 countries worldwide. 

This comes in the wake of the late March cancellation of the Constellation-owned billion-dollar brewery that was set to open in Mexicali. Constellation brands have already spent $7 million on the operation. The company is considering new sites.

No High Hopes for Canopy Growth

Constellation Brands acknowledged an increased need to focus on Canopy Growth Corporation after a rocky yearConstellation took a loss of $575.9 million over the year on its investment in Canopy. 

Since Constellation Brands invested in Canopy, the losses have piled up. The beverage maker purchased a 9.9% stake in the Canadian cannabis giant and invested an additional $4 billion investment a year later. In December, Forbes reported that Canopy Growth would have to sell $3 billion worth of additional pot a year to get its head above water. 

Over FY2020, the carrying value of Constellation’s 38% share in Canopy fell $2.1 billion. 

To gain consumer attention, Canopy launched its first beverage offering, to “overwhelming consumer response,” acknowledged Newlands. “They are awfully good. These are game-changers.”



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