Constellation beer growth soars, so why are shareholders grumbling?

It’s good news for Constellation Brands as the company announces a 21% spike in net sales growth for its beer segment. But the group is also poised to fork out substantial compensation to investors as share structure changes.

It has reported higher than expected earnings for the first three months of its financial year to the end of May but at the same time only maintained its financial forecasts for the full year on the basis of cost inflation and the inability to raise consumer prices by more than the odd percentage point.

Chief executive Bill Newlands said that supply costs rises remained difficult to contain and that there were increasing signs of consumers beginning to tighten their belts as inflation rose.

Constellation is also scraping its dual share structure at a cost of £1.5 billion and has been obliged to switch loans to cannabis producer Canopy Growth into an extra shareholding.

Sales in the March to May quarter increased by 17% to US$2.36 billion, exceeding analysts’ forecasts of US$2.17 billion and Constellation moved into profit, posting a net profit of US$389.5 million compared with a loss of US$908.1 million a year earlier.

Newlands said: “Our beer business [the lion’s share of Constellation’s business and based on the premium Mexican Corona and Modelo brands] delivered net sales growth of 21% and added nearly 15 million cases in incremental shipment volume.

“Our wine and spirits business grew net sales by 2% and saw overall US depletions increased by over 1% with the premium wine and fine wine and craft spirits portions of our portfolio achieving 8% and 16% depletion growth, respectively, with brands like Meiomi, the Prisoner, High West and Casa Noble delivering double-digit depletion growth rates.

“Meiomi, the Prisoner and Kim Crawford remain the driving forces behind our premium and fine wine growth with continued share gains in tracked channels and strong increases in depletions”, he said.

He concluded: “We’re executing against our business strategy, and we’re on track to achieve our targeted financial performance goals for the year.”

However, given the increases in the first quarter, shareholders were disappointed that Constellation did not predict that they would translate into stronger-than-predicted numbers for the rest of the year.

That said, Newlands underlined that “Our balance sheet remains strong….and we exceeded our planned $500 million accelerated share repurchase activity with an additional $800 million in buybacks.

“In fact, we have now fulfilled the share buyback portion of the $5 billion goal in cash returns to shareholders that we promised.

Separately, Constellation confirmed that it had accepted the proposal from the founding Sands family to switch to a single class of shares. Given that Sands had effective voting control, the exercise was a formality.

They will remain the largest shareholders after the switch which simplifies Constellation’s share structure and ends their outright voting control.

Newlands said the scheme would appeal to investors who dislike dual share structures which concentrate voting power, simplify the company’s equity capital structure to better align the voting rights and interests of all shareholders and generate operating cost savings associated with executive salaries and other benefits as well as generating up to US$20 million a year in administrative savings.

The move will cost Constellation some US$1.5 billion in compensation to shareholders for giving up their “B” super shares.

Despite these positive developments, however, Constellation remains under a heavy cloud from its stake in Canada’s largest cannabis producer Canopy Growth.

That is dragging down Constellation. On a reported basis, including the Canopy Growth business, earnings for the full fiscal year are expected to be between US$10.50 and US$10.80 per share, lower than the US$11.15 to US$11.45 Constellation predicted in April.

It has accumulated a US$556 million unrealised loss since its initial investment in Canopy Growth in 2017

The pot producer is burning through cash and as a result Constellation has agreed to swap C$255.4 million ($198 million) of debt for shares and C$3 million in cash for accrued and unpaid interest.

It already has a 36% stake in the cannabis producer, according to data compiled by Bloomberg. That will now rise to almost 40%, effectively giving it control of Canopy.

Newlands defended the move saying: “We continue to believe that our ownership position in Canopy represents a compelling opportunity in a developing industry with significant long-term growth potential.”

That depends on the long-hoped-for passing of federal legislation by Washington to legalise cannabis.

But as one analyst noted: “Canopy ranks among the biggest losers in the cannabis sector this year as the industry falters under the glacial pace of US legalisation”.

The debt for equity swap comes at a time when analysts have slashed their price targets on the stock and investors abandon the sector, with Canopy struggling to hold on in its home market. Its shares have lost some 67% this year.

A further negative influence on Constellation’s likely performance in the rest of this year has come from analysis of the hard seltzer market, where it has aggressively built a position through its Corona brand.

In a new analysis of Boston Beer’s Truly brand, Goldman Sachs has advised holders to sell the craft brewer’s shares because of “the broader slowdown in the hard seltzer category”.