Q1 2025 Earnings Summary
- Constellation Brands has consistently outperformed the beer category due to strong brand performance, with brands like Modelo Especial now being the #1 beer brand in U.S. tracked channels. Their average SKU takeaway in dollars is 5 times the rate of their chief competitors, and Pacifico grew over 20%, being the #4 dollar share gainer across the total beer category.
- The company is executing effective capital allocation priorities, including share repurchases of $200 million in the first quarter and an additional $40+ million through June, with $2.4 to $2.6 billion left on share reauthorization.
- Innovation is expected to drive future growth, with the expansion of successful products like Modelo Aguas Frescas to 20 additional markets (covering 70% to 75% of expected total consumption) after it was the #1 FMB in the Las Vegas test market. Additionally, testing of Corona Sunbrew in the Northeast is showing positive initial response.
- The Wine and Spirits business is facing significant challenges, with a 7% net sales decline in Q1 due to marketplace headwinds, and the expected improvement is heavily weighted towards the second half of the year, making the visibility and timing of this turnaround uncertain.
- Potential political risks from the upcoming U.S. elections, such as proposed tariffs on Mexican imports, could negatively impact the company, which relies heavily on Mexican imports for its beer business. Management considers it too early to speculate but acknowledges the potential impact.
- Despite strong performance and reiterated guidance, the company's stock price remains similar to 2018 levels, raising concerns about investor confidence and future growth prospects, particularly in the beer segment where there are tough comparisons ahead.
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Impact of Peso on Margins
Q: How does peso weakness affect your margins and pricing?
A: Our effective hedging policies allow us to manage currency fluctuations. In Q1, we saw significant peso movements greater than 10% and took advantage by layering in incremental hedges, increasing our hedged position from about mid-70% to 85% for the fiscal year. This disciplined approach provides flexibility even in periods of peso weakness and has been paying dividends for us. -
Operating Profit Guidance
Q: What influences high vs. low end of profit guidance?
A: We feel really good about our full-year guidance of 10% to 12% operating income growth for beer. Our operating margins are expected to be about 39% annually, though not necessarily every quarter due to normal seasonality. Higher volumes in the first half and maintenance in the second half can affect margins, but we are on track and expect some favorability in Q4 due to lapping last year's VAT write-off. -
Marketing and Advertising Spend
Q: Are you underinvesting in marketing this year?
A: We're actually spending more dollars on marketing than in prior years. We've created efficiencies within our spend, so the percentage of sales is slightly less purely due to efficiency. This doesn't change the fact that we're investing more in our brands than ever before. Engaging consumers through national media and digital platforms is critical to creating awareness and bringing consumers into our franchises. We will not starve our brands to hit a margin profile but will continue to invest for growth. -
Potential Tariffs Impact
Q: How would potential tariffs affect your business?
A: It's too early to speculate on the November election outcomes. Our business performed great during the last Trump administration. Our operations involve significant inputs from the Upper Midwest in the U.S., and Mexico remains our biggest trading partner. We're confident we can navigate any changes and will work aggressively to do so. -
Consumer Demand Amid Macros
Q: How is beer demand across income levels?
A: Our buy rates remain extremely strong across all consumer segments. The Hispanic community, which is over 50% of our mix, showed higher buy rates than the total consumer. This loyalty is a long-range benefit, as this community often views beer as a staple. Despite some shifts in pack sizes and channels, our depletion rate was 6.4%, a very strong quarterly result. -
Innovation in Beer
Q: Update on beer innovation contributions?
A: We expanded Modelo Aguas Frescas to 20 additional markets, now covering 70% to 75% of expected consumption. Corona Sunbrew is being tested in the Northeast, and early consumer sampling suggests it will be a home run. While it's too early for concrete results, these initiatives were introduced after significant consumer testing to ensure high probability of success. -
Share Buybacks
Q: Thoughts on share buybacks given stock price?
A: In Q1, we bought back $200 million worth of shares, and an additional $40-plus million through the end of June. We have about $2.4 to $2.6 billion left on our share repurchase authorization. We'll continue to use disciplined capital allocation and buy during periods of dislocation. -
Wine Business Turnaround
Q: Visibility on wine turnaround and distributor commitments?
A: We anticipated a 9 to 12 months period to get our wine business back on track and are pleased with the progress. Improvements are expected to be back-half loaded. We've seen significant engagement with our wholesale network, providing good opportunities later this year. Both our international and DTC businesses are performing ahead of plan. -
Veracruz Brewery Progress
Q: How is Veracruz brewery construction progressing?
A: We are well on our plan and expect to open the brewery at the end of the next fiscal year or early the following year. This year is our peak CapEx year due to construction being at full throttle. By the end of FY25, we expect CapEx to reduce from low double-digit percentage of net sales to mid-single-digit range. Specifically for Veracruz, we are on track.