Bloomberg — Constellation Brands Inc.’s (STZ)shares fell the most since the start of the pandemic after the maker of Modelo and Corona lowered its earnings forecast, citing challenges to its beer business.
There was a “recent series of headwinds” that developed toward the end of the company’s third quarter, Chief Executive Officer Bill Newlands said on a conference call with analysts. This included higher costs across the supply chain as well as poor weather and worsening economic conditions in California, he said.
Aside from Constellation’s own increases to its beer prices, other parties in the distribution chain also raised prices further, executives said on the call.
Constellation shares dropped as much as 9% in New York trading Thursday, the most intraday since April 2020.
A key metric in Constellation’s third quarter, which ended Nov. 30, was beer depletions, or the number of cases sold to retailers by distributors. The depletion rate for beer was 5.7% in the third quarter, down from 8.9% in the second quarter. That disappointed analysts, who said that the shortfall could raise questions about whether the company can keep its margins in the 39% to 40% range for its beer unit.
Newlands confirmed on the call that operating margins are now expected to be below that range, given inflation and the company’s plan to carefully consider any beer price increases in order to maintain growth.
Even so, Newlands said beer “continues to perform strongly relative to the wider market and to resonate with consumers, who continue continue to shift to higher-end brands.” He highlighted Modelo Especial, Pacifico and Corona.
Earlier Thursday, Constellation projected earnings of $11 to $11.20 per share for the year, down from its previous projection of $11.20 to $11.60. The company’s projection for free cash flow increased slightly, to $1.5 to $1.6 billion, up from the $1.3 to $1.4 billion.
In addition to can and gas costs being above pre-pandemic levels, the beer business is subject to inflation for materials such as wood pallets, steel, bottle caps and cartons, Chief Financial Officer Garth Hankinson said.
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