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Cheap wine, cannabis investment drag on Constellation's outlook as stock sinks

Constellation Brands Inc. executives on Jan. 9 said lagging sales of cheaper wines contributed to a negative net sales outlook for wine and spirits for the full fiscal year, pushing shares in the alcohol giant down more than 11% on the weaker guidance.

Shares were down 11.7% to $152.12 in afternoon trading after the beer, wine and spirits maker cut its full-year, non-GAAP EPS expectations for fiscal 2019 to a range of $9.20 to $9.30 from a previous forecast range of $9.60 to $9.75. The company also lowered full-year GAAP EPS to between $12.95 and $13.05, from a previous range of between $14.10 and $14.25. Executives said the drop was because of an expected decline in sales and operating income from wine and spirits by low single-digit percentages for the full fiscal year instead of a previously forecast net sales increase of 2% to 4%.

Wine brands below $11 are driving the declines as consumers flock to higher-priced alternatives, President and COO William Newlands said during a call discussing the company's earnings for its third quarter of fiscal 2019. The lower-priced brands include Clos du Bois, Arbor Mist and Cooks.

"Our long-term view is that the high end of the business … is where we're going to get the kind of margin structure and growth profile that we think we would like to see for our wine business going forward," Newlands said during the call.

Newlands, who will take over as CEO of the company on March 1 following the retirement of CEO and director Robert Sands, raised the possibility of selling off the low-priced wines during the call as one of many options for the struggling business.

"We, as we've said before, are taking a strategic look at what our portfolio should look like going forward, which could include disposition of some of the lower end," Newlands said.

Sands said during an October 2018 investor call the company was considering options to "optimize value" of those lower cost wine brands. Constellation Brands in late October hired an investment bank to review sale options for low-priced wines, though executives have not announced any definite plans for its lower-cost wine portfolio.

The company's revised guidance for fiscal 2019 also factors in higher-than-expected interest from the brewer's $4 billion investment in Canadian cannabis firm Canopy Growth Corp., Executive Vice President and CFO David Klein said.

Financing charges from the deal, which closed Nov. 1, will add $55 million to an updated total interest expense between $380 million and $390 million for the fiscal year, Klein said.

While Constellation booked a $163.9 million decrease in the fair value of its investment in Canopy Growth in the quarter, Klein pointed out that Constellation recognized $1.2 billion in unrealized gains since its initial investment in the cannabis producer in 2017.

Despite the cut in guidance, Constellation Brands is a good bet for investors, Newlands and Klein said. Specifically, they called out the company's near 20% CAGR in comparable diluted EPS over the last three years and plans to return $4.5 billion to investors through fiscal 2022 in the form of dividends and share buybacks.

"As the growth leader in the total U.S. beverage alcohol space, Constellation has a stable, core consumer franchise market with growth prospects that exceed those of our competitors in this sector," Newlands said during the call.