Constellation Brands today (3 September) issued a profit warning after revealing it expects an up to $2.5bn impairment on its wine-and-spirits unit.
The Casa Noble Tequila maker blamed the expected impairment on “continued negative trends primarily in its US wholesale market” as it sees “declines in both the overall wine market and its mainstream premium wine brands”.
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Constellation has also consequently cut its forecast for its annual net sales growth from between 6% and 7% to 4% and 6%.
The US-based group had formerly expected its net sales from wine and spirits to range from a 0.5% decline to 0.5% growth. It now expects to see the segment’s sales drop between 4% and 6%.
The Meiomi Wines producer also projected a significant drag on its reported earnings per share following the wine and spirits impairment, which it said will range from $1.5bn to $2.5bn.
Constellation’s prior outlook had forecast reported EPS to range from $14.63 to $14.93, while now it expects this to range between $3.05 to $7.92 per share.
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By GlobalDataComparable EPS is expected to see a minor increase from the $13.50 to $13.80 range to $13.60 to $13.80.
Constellation also reported it now expects its enterprise operating income to fall as a result of the impairment. It had forecast growth of between 10% and 12% but is now predicting a decline of between 36% and 68%. Comparable enterprise operating income is forecast to rise 8% to 9%, down from an earlier forecast of growth of 8% to 10%.
In a note to clients today (3 September) following Constellation’s announcement, Bernstein analyst Nadine Sarwat said many investors are now seeing the company’s wine and spirits unit “as a litmus test for management’s ability to deliver on its promises and/or make an executive decision regarding selling it”.
In beer, the Modelo brand owner in the US said it expected to see net sales growth dip one percentage point from prior expectations – from between 7% and 9% to 6% and 8%.
In a statement, Constellation president and CEO Bill Newlands said “the commercial and operational execution initiatives” introduced earlier this year within its wine-and-spirits business “are improving the performance of our largest brands, but we continue to face incremental category headwinds further affecting our outlook for this fiscal year”.
Speaking on beer volumes, Newlands added: “While ongoing macroeconomic headwinds, particularly rising unemployment, have led to a recent deceleration in the rate of growth of consumer demand for our products, we are on track to deliver a solid mid-single-digit volume increase this fiscal year for our beer business…
“These trends have been most notable in the top five states for our beer business, which account for just over half of our volumes; however, we continue to see volume growth within the low to mid-single-digit range in these states and within the high single-digit range on average across the rest of the country. Importantly, our beer brands remain strong and loyalty among our core consumers is resilient with only some marginal shifts to value packs and value-oriented channels.”
On Constellation’s comments on beer, Sarwat added: “A bull might be relieved that the weakness is ‘just’ cyclical rather than structural (whether for overall beer or imports specifically). But a bear would argue that a recovery of volumes is now a question of the economy and remains difficult to predict.”
In July, Newlands said he expected “improvements” in wine and spirits net sales in its financial year.
Earlier in April, the group has made investments in 11 “premium and above” wines, to help turn around the weak performance in the segment.
Constellation’s second-quarter fiscal 2025 results are due on 3 October 2024.
