Constellation Brands, Inc. — FY2023 Form 10-K
Business context and period: The filing covers the fiscal year ended February 28, 2023; fiscal Q4 ended on that date. Constellation produces and markets beer, wine, and spirits, principally in the U.S. Its largest business is high-end imported beer, led by Mexican brands including Corona and Modelo. The figures below are in U.S. dollars unless noted.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $9.453 billion | $8.821 billion |
| Gross profit / gross margin | $4.769 billion / 50.5% | $4.707 billion / 53.4% |
| Operating income | $2.843 billion | $2.332 billion |
| Net income (loss) attributable to Constellation | $(71.0) million | $(40.4) million |
| Operating cash flow | $2.757 billion | $2.705 billion |
| Capital expenditures | $1.035 billion | $1.027 billion |
| Total debt at year-end | $12.461 billion | $10.416 billion |
FY2023 net sales grew 7% and operating income grew 22%. Gross margin declined 2.9 percentage points. The company reported a net loss despite higher operating income, primarily reflecting investment-related losses and a higher tax provision. Interest expense was $398.7 million, up 12%. The effective tax rate was 110.0%, largely affected by valuation allowances related to Canopy.
Fiscal Q4: Net sales were $1.998 billion versus $2.103 billion in the comparable quarter; gross profit was $961.2 million versus $1.133 billion. Net income attributable to Constellation was $223.0 million versus $395.4 million.
Liquidity: Cash and cash equivalents were $133.5 million at year-end. Short-term borrowings were $1.165 billion, and reported remaining revolving-credit capacity was $1.069 billion. The company said operating and financing cash flows should provide adequate resources for working capital, debt service, dividends, repurchases, and planned capital expenditures, absent deterioration in market conditions. It was in compliance with its debt covenants at year-end.
Segments and changes versus prior year
- Beer: Net sales increased 11% to $7.465 billion; shipments rose 6.9% and U.S. depletions 7.5%. Segment operating income rose 6% to $2.862 billion. Growth was driven by volume and pricing, partly offset by higher material, production, and logistics costs, marketing investment, and unfavorable package mix.
- Wine and Spirits: Net sales decreased 4% to $1.988 billion and segment operating income decreased 4% to $453.1 million. The 2022 wine divestiture and lower shipment volumes weighed on sales; favorable premium mix, DTC sales, and pricing partly offset the decline.
- Canopy: Canopy results are accounted for under the equity method and eliminated from consolidated sales. Constellation recorded a $1.060 billion impairment of its Canopy equity-method investment and $949.3 million of equity losses from Canopy and related activities. Canopy’s reported sales fell 24% to $339.3 million.
Outlook, commentary, and material items
- Management expects inflation, supply-chain and transportation challenges, and pressure on consumer discretionary income to continue into FY2024. It intends to consider pricing and pursue cost savings, but said it cannot assure that higher costs can be fully offset.
- FY2024 capital expenditures are projected at $1.2–$1.3 billion, including approximately $1 billion for Mexico Beer Projects. The company expects to spend a further $4.0–$4.5 billion on Mexico Beer Projects over FY2024–FY2026 and targets Mexican brewery capacity of approximately 67–72 million hectoliters by FY2026.
- Management expects an FY2024 effective tax rate of 18%–20%, excluding future Canopy fair-value changes and equity-method results. It expects marketing spending to equal 8% of net sales and to return approximately $650 million to stockholders through dividends in FY2024.
- Constellation expects to record its proportional share of Canopy’s announced losses—approximately C$145–C$180 million—in applicable FY2024 results. A further impairment of its Canopy investment remains possible if Canopy’s share price does not recover.
- The November 2022 stock reclassification converted Class B shares into Class A shares and involved a $1.5 billion cash payment, funded partly with borrowings. The company repurchased $1.700 billion of stock and paid $587.7 million in dividends during FY2023.
- In March 2023, the company agreed to sell its Daleville facility; closing was expected in the quarter ending May 31, 2023, subject to approvals and customary conditions. Proceeds were expected to be used primarily for general corporate purposes, including debt retirement.
- Craft beer weakness led to $53.5 million of long-lived-asset impairment and $13.0 million of trademark impairment. The company also continues to pursue recovery from remaining Mexicali Brewery assets after a prior $665.9 million impairment in FY2022.
- Key risks include water availability and climate-related events, glass and other input supply constraints, inflation and freight costs, reliance on Mexican beer and major distributors, execution and returns on substantial brewery investment, debt and interest-rate exposure, and uncertainty around Canopy and U.S. cannabis regulation. The company disclosed a favorable jury verdict in a Mexican beer trademark case in March 2023; a plaintiffs’ post-trial motion was denied in April 2023.
Important facts for investors to verify
- Whether beer shipment and depletion growth, pricing, and product mix can sustain segment earnings as input and logistics costs evolve.
- Progress, cost, timing, permits, water access, and demand assumptions behind the Mexico brewery expansion and capacity plan.
- Canopy transaction and exchange status, the value and accounting treatment of the investment, and potential additional losses or impairment.
- Debt maturities, borrowing costs, liquidity headroom, and the funding balance between capital investment, dividends, and repurchases.
- Whether wine and spirits volumes and margins stabilize after divestitures and continued portfolio changes.
- Completion and proceeds of the Daleville sale, and any remaining exposure or recovery from Mexicali assets and disclosed legal or regulatory matters.