While mentioned almost in passing, Constellation Brands’ latest earnings report predicts wine sales to decline by 20–25% and spirits sales to fall 25–30% in fiscal year 2020. This is a result of its $1.7 billion sale of more than 30 wine brands to E. & J. Gallo Winery.
The sale of those brands along with six wineries had originally been expected to close in Q1. It now looks to be finalized by the end of the second quarter.
Constellation focuses on premiumization
Constellation Brands is concentrating on what it is calling its power brands such as Kim Crawford, Meiomi and The Prisoner. The company has seen its operating margins rise 90 basis points to 25.9% in the wine and spirits category. Credit has been given to pricing and lower marketing costs.
Canopy Growth investment losses
Constellation’s 2017 and 2018 investments totaling about $ 4 billion in Canadian cannabis producer Canopy Growth have caused a few upsets. It had to write down $828 million of the investment this quarter and posted a $106 million loss.
The Fortune 500 company still managed to report higher than expected revenue for the fiscal first quarter ending May 31 of $2.21 per share, topping the analysts’ consensus of $2.04 per share.
Wine shipments decrease
Constellation reported wine and spirits shipments were down 8.1%, and depletions were down 0.7% during the quarter. Net sales were $619.8 million down 7.8 % year over year.
In addition to the net decline wine and spirits sales, operating income is expected to decline by up to 30%. It also forecast cost reductions of $35 million to $55 million in fiscal year 2020 and $95 million to $75 million in fiscal year 2021.
The company did raise its fiscal outlook for 2020. It now expects to report full-year adjusted earnings per share in a range of $8.65 to $8.95, up from previous guidance of $8.50 to $8.80.