Constellation Brands (STZ), the maker of Modelo and Corona, delivered better-than-expected quarterly earnings, but the upbeat numbers came with a sobering message: slowing beer demand, rising tariffs, and shifting consumer habits continue to pressure growth.
Key Points
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Constellation Brands topped Wall Street estimates with adjusted EPS of $3.63 and revenue of $2.48 billion.
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Beer sales fell 7% year-over-year, with Modelo and Corona showing notable volume declines.
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Management reaffirmed muted full-year guidance as tariffs, inflation, and changing consumer behavior weigh on margins.
Why Are Constellation Brands’ Beer Sales Falling?
Beer demand remains under pressure, particularly among lower-income and Hispanic consumers — a group that has historically been core to Constellation’s success.
Beer depletions, or the rate at which distributors sell to retailers, dropped 2.7%, slightly better than expected but still showing soft consumption. Modelo volumes fell 4%, while Corona declined 7%. These numbers underscore how economic strain and affordability concerns are cutting into consumer spending on premium beverages.
CEO Bill Newlands acknowledged the headwinds, noting that “high-end beer buy rates decelerated sequentially,” especially in markets impacted by immigration and labor challenges.
How Did Constellation Brands Perform Financially in Q3?
Constellation Brands posted revenue of $2.48 billion, down 15% year-over-year, but still beat estimates by a small margin. Adjusted earnings came in at $3.63 per share, surpassing analyst expectations by about 6.5%.
Operating margin improved significantly to 35.2%, a turnaround from last year’s negative margin, though free cash flow margin slipped slightly to 25.6%.
Despite the earnings beat, management lowered its full-year guidance, expecting adjusted EPS between $11.30 and $11.60 — below previous projections of up to $12.90.
Tariffs and higher aluminum costs are expected to cost roughly $90 million this year, and while cost-saving initiatives have helped, margin recovery remains gradual.
Can Constellation Brands Overcome Its Challenges?
The company continues to gain market share in the U.S. beer segment, even as overall demand declines. Its focus on brand investments, distribution gains, and premiumization in wine and spirits may help support future growth.
Constellation also continues to repurchase shares, buying back $298 million worth in the latest quarter, reflecting confidence in long-term value creation.
However, the company faces a changing landscape — younger consumers are drinking less, tariffs are weighing on exports, and Canadian retailers are boycotting American-made wine and spirits.
The rise of cannabis-infused beverages could provide a future growth channel. Constellation is exploring hemp-derived THC drinks as part of a broader diversification strategy aimed at capturing emerging beverage trends.
What It Means for Investors
For investors, the message is mixed. Constellation’s earnings beat shows resilience, but volume trends and margin pressures suggest limited near-term upside.
Bullish analysts argue that much of the downside risk is already reflected in the share price and point to the company’s strong balance sheet as a safety net. Others remain cautious, warning that continued consumer weakness and cost inflation could lead to more guidance cuts.
With shares trading near $144 and consensus price targets slipping from $179 to $176, the risk-reward balance remains uncertain.
Conclusion
Constellation Brands managed to clear low expectations with its latest results, but the broader picture remains challenging. Demand softness, tariff costs, and evolving consumer habits continue to cloud the outlook. While management’s discipline and strong brand portfolio provide stability, investors may want to wait for clearer signs of a turnaround before raising their glasses to this stock.
FAQs
Why did Constellation Brands’ beer sales decline?
Beer sales fell due to weaker demand among lower-income and Hispanic consumers, combined with affordability concerns and a broader decline in alcohol consumption across the U.S.
How did Constellation Brands perform financially this quarter?
The company beat Wall Street estimates with adjusted EPS of $3.63 and revenue of $2.48 billion, though sales were down 15% year-over-year due to softer demand and higher costs.
What are the main challenges facing Constellation Brands?
Key challenges include tariffs on aluminum, weak consumer spending, changing drinking habits among younger demographics, and a decline in export demand due to Canadian boycotts of U.S. spirits and wine.
Is Constellation Brands exploring new markets or products?
Yes. The company is investing in cannabis-infused beverages and premiumization in its wine and spirits portfolio as it seeks new growth avenues beyond traditional beer.
Should investors buy STZ stock now?
Analyst sentiment is divided. Some view the current valuation as attractive given the company’s market share gains, while others recommend waiting for stronger volume recovery and margin stabilization before buying.
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