Constellation Brands, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended August 31, 2022; comparative periods ended August 31, 2021. The company produces and markets beer, wine, and spirits, and accounts for its Canopy Growth investment under the equity method.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $2.655 billion, up 12% | $5.018 billion, up 14% |
| Gross profit / margin | $1.326 billion / 49.9%, versus 51.9% | $2.581 billion / 51.4%, versus 53.4% |
| Operating income | $813.1 million, up 10% | $1.630 billion, versus $814.3 million |
| Net income (loss) attributable to CBI | $(1.151) billion, versus $1.5 million income | $(761.7) million, versus $(906.6) million |
| Operating cash flow | Not presented for the quarter | $1.654 billion, versus $1.526 billion |
Beer drove growth: quarterly Beer net sales rose 15%, supported by Mexican beer shipment growth and pricing; depletions increased 8.9%. Wine and Spirits net sales rose 1%, while segment operating income declined 1%. Six-month capital expenditures were $435.0 million, compared with $353.4 million.
Balance sheet and capital
- At August 31, cash and cash equivalents were $165.1 million; total debt was approximately $10.95 billion, up $533.7 million from February 28. Commercial paper outstanding was $663.9 million, with a 3.0% weighted-average annual rate.
- Unused revolving-credit capacity was $1.574 billion, net of commercial paper and letters of credit. The company reported compliance with debt covenants.
- Six-month financing included $1.401 billion of share repurchases and $295.3 million of dividends paid. The board declared subsequent quarterly dividends of $0.80 per Class A share and $0.72 per Class B and Class 1 share.
Material changes, outlook, and risks
- A $1.060 billion impairment reduced the Canopy equity-method investment to $634.8 million. Canopy-related equity losses and fair-value changes drove a $1.719 billion quarterly loss from unconsolidated investments. Management cited Canopy’s weakened outlook and uncertainty around U.S. federal cannabis permissibility; further impairment is possible.
- Gross margin contracted despite higher Beer sales, reflecting inflation, freight and other operating costs, product mix, and comparable-adjustment items. Management said these pressures could continue and may not be fully offset by pricing or savings.
- Management forecast a Fiscal 2023 reported effective tax rate of 70%–72%; the estimate excludes future Canopy fair-value changes and equity-method results. Beer and Wine and Spirits marketing spend was expected to be 9%–10% of respective net sales. For the remainder of Fiscal 2023, U.S. Wine and Spirits depletion volume was expected to exceed shipment volume.
- The company is developing the Veracruz brewery after canceling the Mexicali project; it is seeking potential recovery of Mexicali-related costs but gave no assurance of recovery. It said existing Nava and Obregon capacity should meet medium-term needs under normal conditions.
- The proposed Class B reclassification would convert each outstanding Class B share into one Class A share plus $64.64 cash. The company expected an aggregate cash payment of about $1.5 billion, partly financed by a $1.0 billion delayed-draw facility and up to $500 million of short-term debt. A shareholder lawsuit seeks to block the transaction; approval, timing, costs, and outcome remain uncertain.
- On October 6, 2022, the company sold certain mainstream and premium wine brands and related inventory, with proceeds expected primarily to reduce borrowings and for general corporate purposes.
Important facts for investors to verify
- Whether Canopy’s operating and market-value deterioration leads to further losses or impairment.
- Progress, approval, litigation outcome, and actual financing costs for the proposed reclassification.
- Whether Beer volume and pricing can continue to offset inflation, supply-chain, and logistics costs, and whether gross margins stabilize.
- Actual proceeds and debt reduction from the wine divestiture, alongside debt levels, cash generation, and capital returns.
- Whether the expected tax rate and Wine and Spirits shipment-versus-depletion trends track management’s stated outlook.