Constellation Brands' 2026 Q3 Earnings Call: Contradictions Emerge on Margin Guidance, Tariff Impact, and Volume Uncertainty

Business Commentary:

* Beer Segment Performance and Margin Challenges: - Constellation Brands reported a significant decline in beer segment volume in Q3, contributing to lower operating margins despite favorable pricing actions and cost savings initiatives. - The margin pressure was exacerbated by tariffs, logistics issues, and brewery maintenance, alongside a shift in product mix towards aluminum packaging.

• Capacity Expansion and Utilization:
• The company reiterated plans to expand brewing capacity by 7 million barrels by fiscal 2028, with significant capital expenditures committed for the fiscal year.

• The capacity expansion is designed to support long-term growth, although the current volume projections are lower due to macroeconomic conditions, prompting a modular approach to brewery capacity management.

• Pricing Strategy and Market Dynamics:

• Constellation Brands maintained a pricing increase of 1.5% in Q3, offsetting negative mix from package type changes.

• The pricing strategy is part of an ongoing effort to adjust price pack architecture to meet consumer demands amidst a challenging economic environment, with initiatives like Modelo Oro and Corona Premier showing improved trends.

• Distribution Growth and Retailer Engagement:

• The company observed mid-single-digit distribution growth for its beer portfolio in Q3, driven by gaining share in 49 states and expanding presence for brands like Pacifico and Victoria.

• The focus on distribution growth is underscored by retailer initiatives like Shopper-First Shelf, aiming to enhance category performance amid a challenging beer market.

• Outlook and Strategic Focus:

• Constellation Brands remains cautiously optimistic about potential recovery in the beer business, highlighting the positive impact of strong brand health and upcoming events like the World Cup.
• The strategic focus is on controlling controllables, such as distribution and pricing, while navigating macroeconomic pressures and consumer spending patterns, particularly among Hispanic consumers.

Sentiment Analysis:

Overall Tone: Neutral

• Management acknowledges a challenging macro environment with specific pressures on beer margins and volume, stating 'the macroeconomic environment has worsened' and 'it's been very difficult to predict.' However, they express continued confidence in brand strength and strategic initiatives, noting 'we continue to make good progress against our cost savings initiatives' and highlighting successful brand performance like Pacifico.

Q&A:

• Question from Bonnie Herzog (Goldman Sachs): Could you discuss the puts and takes behind the stronger-than-expected beer operating margins in Q3 despite volume deleverage, and what is expected to weigh on margins in Q4?
  Response: Q3 margin strength offset volume headwinds with cost savings, favorable pricing, and a depreciation timing benefit. Q4 margins expected to be seasonally low, with headwinds from fixed overhead absorption, a reversal of the Q3 depreciation benefit, higher tariffs (due to aluminum prices and product mix shift to aluminum), and timing of tariff accruals.

• Question from Nadine Sarwat (Bernstein): How should we think about the 39%-40% beer margin guidance for fiscal 2027/2028 given current pressures, and what is the depletion trend in December?
  Response: FY27 beer margin guidance will be provided in the April earnings call, revised for the worsened macro environment. December depletion was in line with expectations, with a strong Christmas holiday performance reflecting brand health.

• Question from Lauren Lieberman (Barclays): Can you update on the modular capacity build-out plans and how they align with growth projections given the lower fiscal 2026 volume outlook?
  Response: The modular approach continues; capacity expansion commitments are firm due to long-lead items, but asset activation can be managed to align with volume expectations, allowing for potential CapEx deferral where possible.

• Question from Robert Ottenstein (Evercore ISI): What have you learned about the Pacifico brand's incremental potential and marketing investment needed to reach its full #3 portfolio potential?
  Response: Pacifico is a younger, socially engaged brand gaining share, especially in on-premise; significant investment will continue as it expands across the country, mirroring Modelo's earlier growth trajectory.

• Question from Dara Mohsenian (Morgan Stanley): Is it realistic to drive shelf space gains post-spring resets given the macro, and what is the outlook for the beer category?
  Response: Distribution remains a key growth opportunity, with share gains in 49 states; the category is challenged, especially among Hispanic consumers concerned about spending, but the company focuses on controlling distribution, price architecture, and brand health.

• Question from Drew Levine (JPMorgan): Can you quantify the headwinds from aluminum and depreciation on Q4 beer margins, and why were off-premise depletions better than expected?
  Response: Q4 margin headwinds include a reversed depreciation benefit, higher tariffs (due to aluminum price increases and mix shift), tariff timing accruals, and some expense timing. Off-premise depletion strength was aided by better performance in less-tracked regions and channels like on-premise draft.

• Question from Gerald Pascarelli (Needham & Company): Given macro pressures and tailwinds like the World Cup, how do you think about a potential recovery in the beer business over the next year?
  Response: Cautiously optimistic but difficult to predict due to volatility; consumer sentiment, particularly among Hispanics, remains a key variable, but brand health and 'beer moments' like the World Cup present opportunities.

• Question from Robert Moskow (TD Cowen): As we lap the initial shock of immigration policy restrictions, could Hispanic consumer pressure lessen, leading to better than mid-single-digit decline trends?
  Response: Hope is expressed, but volatility persists state-by-state; focus remains on controlling controllables and leveraging successful brands like Pacifico, Victoria, and Modelo Draft.

• Question from Filippo Falorni (Citi): How will beer pricing and package mix evolve, and are you seeing volume uptick from price adjustments on Modelo Oro and Corona Premier?
  Response: Pricing outlook remains 1-2% with variation; price pack architecture adjustments (e.g., 7-ounce sizes) and Oro/Premier price changes have improved trends, meeting consumer price concerns.

• Question from Peter Galbo (Bank of America): Clarify the expectation for year-over-year volume declines in beer for Q4—does it apply to shipments and depletions?
  Response: The expectation is for billings and depletions to be largely aligned in Q4, reversing minor Q3 variation, with both expected to be negative.

• Question from William Kirk (ROTH Capital Partners): How might the rescheduling of cannabis and bans on intoxicating hemp beverages impact your business?
  Response: Cannabis exposure is limited to Canopy shares; no significant impact on beer from hemp beverage bans yet, but disposable income shifts will be monitored.

• Question from Michael Lavery (Piper Sandler): How should we think about the impact of the World Cup on top line and spending?
  Response: The World Cup is a significant beer occasion, especially for Hispanics; the company will support with promotions, shelf presence, and in-game media consistent with its ongoing sports investment focus.

Contradiction Point 1

Confidence in Full-Year Margin Guidance

This is a direct contradiction regarding the company's stated confidence in delivering its full-year beer operating margin targets. In Q1, confidence was firm despite macro uncertainty, but by Q3, guidance was revised downward, explicitly citing worsened macro conditions. This signals a loss of earlier confidence and a material shift in the financial outlook.

How should we assess the prior guidance of 39%-40% beer margins for fiscal 2027/2028 considering Q4 pressures? Can you elaborate on the depletion trends or exit rate for December? - Nadine Sarwat (Bernstein)

20260108-2026 Q3: The FY27 beer margin outlook will be provided in the April earnings call... The prior guidance was given under different, now worsened, macro conditions, which will be reflected in the updated outlook. - Garth Hankinson(CFO)

Can you discuss confidence in the unchanged full-year beer revenue growth and margin guidance, given recent industry weakness and rising aluminum tariffs? - Dara Warren Mohsenian (Morgan Stanley)

2026Q1: Confidence in full-year guidance is maintained despite macro uncertainty (GDP, inflation, unemployment, potential tariffs). The company still believes it can deliver margins in line with April's outlook. - Garth Hankinson(CFO)

Contradiction Point 2

Aluminum Tariff Impact and Financial Guidance

This involves a material change in the communicated financial impact of a significant headwind (aluminum tariffs). The guidance shifts from a specific, manageable quantification (~$20M impact, ~20 bps margin headwind in Q2) in Q1 to a broader, more severe description ("increased tariffs...product mix shift," contributing to Q4 margin pressure) in Q3, without reconciling the increased severity.

What factors drove the stronger-than-expected Q3 beer operating margins despite volume-related margin pressure? What challenges are expected to impact Q4 beer margins, considering the full-year guidance suggests more modest margin growth? - Bonnie Herzog (Goldman Sachs)

20260108-2026 Q3: Additional Q4 headwinds include: ... increased tariffs related to higher aluminum prices... and a timing element where tariff costs accrue in inventory and then hit the P&L. - Garth Hankinson(CFO)

Can you explain confidence in maintaining full-year beer revenue growth and margin guidance despite recent industry weakness and higher aluminum tariffs? - Dara Warren Mohsenian (Morgan Stanley)

2026Q1: The recently implemented incremental aluminum tariff... is expected to have a ~$20 million impact in Q2 (vs. a full-year impact of ~$30 million previously communicated). This will result in a ~20 basis point margin headwind, but the company still believes it can deliver margins in line with April's outlook. - Garth Hankinson(CFO)

Contradiction Point 3

Beer Volume Outlook and Guidance Philosophy

This represents a strategic shift in how the company communicates its forward-looking volume expectations. In Q4 2025, the company affirmed it *would* provide specific volume guidance. By Q3 2026, under similar or greater macro pressure, the CEO stated it is *difficult to predict a bottom*, effectively abandoning the prior commitment to specific guidance, indicating a higher level of uncertainty and potentially less predictable future performance.

How are you assessing the beer business's potential recovery next year, factoring in easier comparisons and the World Cup? - Gerald Pascarelli (Needham & Company)

20260108-2026 Q3: We are cautiously optimistic but find it difficult to predict a bottom due to volatility... the outlook depends heavily on consumer sentiment and macroeconomic conditions. - William Newlands(CEO)

Are you referring to shipments, depletions, or both regarding the expected improvement in year-over-year beer volume declines? Do you still expect a negative beer volume in Q4? - Peter Galbo (Bank of America)

2025Q4: We do provide volume guidance for the full fiscal year, and we will update that guidance as we go through the year based on actual performance. - Garth Hankinson(CFO)

Contradiction Point 4

Consumer Environment and Volume Recovery Expectations

This highlights a deepening and material shift in the assessment of the core demand drivers. In Q2, volume challenges were framed as a "cyclical pullback" with a return to growth expected. By Q3, the view has evolved to include specific, ongoing consumer caution (e.g., Hispanic consumers) and structural policy impacts, making a near-term recovery less certain. This is a change in the fundamental growth narrative.

How are you assessing the beer business's potential recovery next year, considering factors like easier comparisons and the World Cup, amid macroeconomic pressures? - Gerald Pascarelli (Needham & Company)

20260108-2026 Q3: The company is cautiously optimistic but finds it difficult to predict a bottom due to volatility, especially among Hispanic consumers who remain concerned... The focus remains on controlling the controllables... - William Newlands(CEO)

Would volumes have grown without ICE activities, and will growth resume next year after these activities are lapped? - Nik Modi (RBC Capital Markets)

2026Q2: Yes, the key issue is consumer sentiment... This cyclical consumer pullback is impacting engagement, although loyalty for brands like Corona and Modelo is up. The company is positioned well for when consumer confidence returns. - William Newlands(CEO)

Contradiction Point 5

Beer Margin Guidance and Communication

While both statements mention providing updated margin guidance in April, the Q3 statement adds critical context: the Q3 guidance is now "more modest," and the Q4 headwinds are specifically detailed. The Q4 2025 statement was made before these new headwinds (e.g., tariff timing, mix shift) were highlighted, creating an inconsistency in the completeness and basis of the guidance timeline.

How should we assess the 39%-40% beer margin guidance for fiscal 2027/2028 considering Q4 pressures? Can you update on the December depletion exit rate or trends? - Nadine Sarwat (Bernstein)

20260108-2026 Q3: The FY27 beer margin outlook will be provided in the April earnings call, as it depends on consumer and macroeconomic developments. - Garth Hankinson(CFO)

How will cannabis rescheduling affect your exposure? Would your beer business benefit if intoxicating hemp beverages are banned in some states? - William Kirk (ROTH Capital Partners)

2025Q4: We will provide updated margin guidance for the full fiscal year in our next earnings call, which will be in April. - Garth Hankinson(CFO)