Executive Summary / Key Takeaways

• Constellation Brands, a leader in the U.S. beverage alcohol market, is anchored by its high-performing Beer segment, driven by iconic brands like Modelo Especial and Corona Extra, which consistently outperform the broader industry and fuel robust cash flow generation.
• The company is strategically transforming its Wine and Spirits business through divestitures of mainstream brands and targeted acquisitions of higher-end assets, aiming for improved growth and margins beyond fiscal 2026, despite facing current category headwinds and retailer destocking.
• A comprehensive enterprise-wide cost savings and restructuring initiative is underway, targeting over $200 million in net annualized savings by fiscal 2028, which is expected to enhance profitability and provide funds for reinvestment in core brands.
• Management has provided updated guidance reflecting a more cautious near-term outlook influenced by socioeconomic factors impacting consumer spending and potential tariff impacts, but maintains confidence in delivering strong operating and free cash flow ($9B and $6B respectively, FY26-28) and double-digit comparable EPS growth over the medium term.
• Supported by strong cash flow and having achieved its target leverage ratio, the company is committed to a disciplined capital allocation framework, including a 30% dividend payout ratio and a new $4 billion share repurchase authorization, signaling confidence in future value creation despite market volatility and competitive pressures.

The Enduring Strength of the Crown: Constellation Brands' Core Narrative

Constellation Brands stands as a formidable force in the U.S. beverage alcohol landscape, built upon a foundation of powerful, consumer-connected brands. Its journey, rooted in a business founded in 1945, has evolved into an international enterprise with a strategic vision centered on delivering industry-leading total stockholder returns. At the heart of this vision lies a focus on consumer-led premiumization, operational excellence, and disciplined capital deployment. The company's exclusive, perpetual right to import, market, and sell its Mexican beer brands in the U.S. has been a game-changer, propelling it to the forefront of the high-end beer segment and establishing brands like Modelo Especial and Corona Extra as household names.

This market dominance is not merely a matter of legacy; it is actively maintained through a multi-pronged strategy that includes continuous investment in brand equity, expanding distribution, and driving innovation. While the Beer segment serves as the primary engine of growth and profitability, the company is simultaneously executing a multi-year transformation of its Wine and Spirits business, shedding lower-margin assets to focus on a higher-end portfolio aligned with evolving consumer preferences. This dual focus, underpinned by a commitment to efficiency and strategic capital allocation, forms the core investment narrative for Constellation Brands.

In a highly competitive industry populated by multinational giants like Anheuser-Busch InBev (BUD), Molson Coors (TAP), and Diageo (DEO), Constellation Brands carves out its niche through distinct strengths. Unlike BUD and TAP, whose portfolios lean heavily towards mainstream and economy beers (though BUD also has premium imports), STZ's Beer segment is almost exclusively focused on the high-end imported category, which has consistently grown faster than the overall beer market. This focus has allowed STZ's Beer segment to achieve significantly higher operating margins (approaching 40%) compared to the broader portfolios of its beer-centric rivals. While DEO competes across spirits and wine with a global footprint and strong premium brands, STZ's competitive advantage lies in its concentrated U.S. beer dominance and its strategic pivot in Wine and Spirits to target specific, high-growth premium niches within the U.S. market, leveraging its established distribution networks. STZ's average SKU takeaway in dollars is notably five times the rate of its "cheap competitors," underscoring the premium value and velocity its brands command at retail.

Underpinning Constellation's operational strategy is its multi-year Digital Business Acceleration initiative. This program is designed to enhance technology capabilities across key areas, including end-to-end digital supply chain planning, logistics, procurement, revenue growth management, and consumer insights and analytics. The stated goal is to create a cohesive digital strategy and build an advanced digital business. While specific quantitative metrics on the benefits of this digital transformation are not detailed, the strategic intent is clear: to drive results by improving operational efficiency, optimizing expenditures, gaining deeper consumer understanding, and enhancing market responsiveness. This technological focus is intended to provide a competitive edge by enabling more agile decision-making, better resource allocation, and more effective engagement with consumers and the supply chain, contributing to the company's ability to maintain leading margins and drive targeted growth. Furthermore, the company's equally-owned joint venture operating a state-of-the-art glass production plant adjacent to its Nava Brewery provides a significant operational differentiator, supplying nearly 60% of the glass bottles for its Mexican beer brands and contributing to supply chain stability and cost management.

Performance and Transformation in Motion

Fiscal year 2025 demonstrated Constellation's ability to deliver enterprise net sales growth and substantial comparable operating margin improvement despite a challenging macroeconomic backdrop characterized by subdued consumer spending and value-seeking behaviors. Consolidated net sales increased 2.5% to $10.21 billion, while comparable operating income grew 7.0%. This performance was largely fueled by the Beer segment.

The Beer segment continued its impressive trajectory, with net sales growing 5.0% to $8.54 billion and comparable operating income increasing 10.0% to $3.39 billion in Fiscal 2025, resulting in a robust operating margin of 39.7%. This growth was driven by a combination of shipment volume increases and favorable pricing, although partially offset by unfavorable product mix shifts towards larger, value-oriented packs. Key brands like Modelo Especial (the #1 beer brand in the U.S. by dollar sales and a top share gainer) and Pacifico (a top two fastest-growing major imported beer brand) continued to drive performance. Operational efficiency initiatives contributed significantly to margin expansion, offsetting increased marketing spend aimed at supporting brand momentum and capturing new consumers. The company is actively expanding its production capacity in Mexico, with approximately $2 billion planned for capital expenditures over Fiscal 2026 through Fiscal 2028, primarily for the Veracruz Brewery and modular additions at existing facilities, to support anticipated future growth. As of February 28, 2025, Mexican brewery capacity stood at approximately 48 million hectoliters, with plans to reach 55 million hectoliters by the end of Fiscal 2028.

In contrast, the Wine and Spirits segment faced significant headwinds, with net sales declining 7.2% to $1.67 billion and comparable operating income decreasing 18.5% to $325.1 million in Fiscal 2025, resulting in an operating margin of 19.5%. This decline was primarily driven by decreased branded shipment volume in the U.S. wholesale market, impacted by overall wine category weakness and retailer inventory destocking. Unfavorable product mix and pricing actions also weighed on results. In response, the company accelerated its portfolio transformation. The divestiture of the SVEDKA brand in January 2025 and the agreement in April 2025 to divest primarily mainstream wine brands and associated assets for $900 million underscore the strategic pivot towards a higher-end, more focused portfolio. While this transformation is expected to impact near-term results, management anticipates significant performance improvements in the Wine and Spirits business beyond fiscal 2026 as the repositioning takes full effect and associated cost savings are realized.

Enterprise-wide efficiency efforts are a critical component of the strategy. The 2025 Restructuring Initiative, launched to optimize performance through enhanced organizational efficiency and optimized expenditures, is expected to yield over $200 million in net annualized cost savings by fiscal 2028. The majority of the work is slated for completion within Fiscal 2026, with estimated pre-tax costs of $80 million to $100 million. These savings are intended to not only improve margins but also provide flexibility for reinvestment in growth initiatives.

Financially, Constellation Brands demonstrated strong cash flow generation, a hallmark of its business model. Net cash provided by operating activities increased in Fiscal 2025, contributing to a year-end cash balance of $68.1 million. The company's disciplined approach to capital allocation is evident in its achievement of the target comparable net leverage ratio and its commitment to returning value to shareholders. A new $4 billion share repurchase authorization, expiring in February 2028, was approved in April 2025, replacing the prior authorization. This follows $1.12 billion in share repurchases during Fiscal 2025. The company also declared a quarterly cash dividend, signaling its intention to continue returning capital, targeting a 30% payout ratio.

Outlook and the Path Forward

Constellation Brands' outlook for Fiscal 2026 through Fiscal 2028 reflects both the continued strength of its core Beer business and the ongoing transformation of its Wine and Spirits segment, set against a backdrop of macroeconomic uncertainty and potential external pressures. Management anticipates Beer net sales growth of 0% to 3% in Fiscal 2026, accelerating to 2% to 4% in Fiscal 2027 and 2028. This revised medium-term outlook, while lower than prior expectations, incorporates the anticipated impact of tariffs announced by the U.S. and Canadian governments, particularly on aluminum cans for the Beer business, and reflects a cautious stance on the duration of socioeconomic factors impacting consumer demand. Despite these top-line adjustments, Beer operating margins are expected to remain robust at approximately 39% to 40% in Fiscal 2027 and 2028, supported by operational efficiencies, pricing, and volume growth.

The Wine and Spirits business is expected to face continued headwinds in Fiscal 2026, with depletion volume anticipated to outpace shipment volume, particularly in the first quarter. However, management projects a return to net sales growth for this segment beyond Fiscal 2026, contingent upon the successful completion of the planned divestitures and the realization of associated cost savings and strategic benefits of focusing on higher-end brands.

Enterprise-wide, the company targets operating income growth of 0% to 2% in Fiscal 2026. A key highlight of the forward outlook is the projected strong cash flow generation, with targets of approximately $9 billion in operating cash flow and $6 billion in free cash flow from Fiscal 2026 through Fiscal 2028. This substantial cash flow is earmarked for continued investment in Beer capacity expansion, funding the dividend program, and executing against the significant share repurchase authorization. Capital expenditures are expected to peak in Fiscal 2025, transitioning to a mid-single-digit percentage of net sales by the end of the medium-term outlook period (Fiscal 2029). The new Veracruz Brewery remains on track for completion of its initial phase by late Fiscal 2026 or early Fiscal 2027.

Risks on the Horizon

While the investment thesis is compelling, several risks could impact Constellation Brands' trajectory. The primary near-term uncertainty revolves around the duration and severity of socioeconomic factors affecting consumer spending and value-seeking behavior, particularly among the crucial Hispanic consumer demographic. Elevated unemployment in key markets and concerns about inflation could continue to pressure demand for beverage alcohol.

Potential changes in trade and tariff policies, including the recently implemented 25% tariff on imported canned beer and empty aluminum cans from Mexico, pose a direct cost risk to the Beer business. While the company has hedging programs and may implement pricing adjustments, the full impact and consumer response remain uncertain. Geopolitical tensions and trade disputes could exacerbate these risks.

Competition remains intense across all segments. While STZ has successfully gained market share, particularly in high-end beer, maintaining this momentum requires sustained investment in marketing and innovation. The Wine and Spirits segment faces ongoing category headwinds and intense competition from both large players and smaller craft producers, making the turnaround strategy challenging.

Operational risks include dependence on limited production facilities in Mexico and potential disruptions from severe weather, natural disasters, or supply chain constraints (e.g., water availability, glass bottle supply). The significant capital expenditures for brewery expansion carry execution risks, including potential delays or cost overruns.

Finally, the company's investment in Canopy Growth Corporation (CGC) has historically been volatile and subject to significant impairments, although the shift to Exchangeable Shares in April 2024 altered the nature of this exposure. Litigation risks, including securities class actions, also remain a factor to monitor.

Conclusion

Constellation Brands presents a compelling investment case built on the enduring strength and market leadership of its U.S. Beer business, a segment that consistently delivers robust growth and profitability despite broader industry fluctuations. The strategic transformation of the Wine and Spirits portfolio, while facing near-term challenges, is a necessary step to align the business with long-term premiumization trends and unlock future value. Supported by strong and growing cash flow generation, the company is well-positioned to fund its capacity expansion, return capital to shareholders through dividends and significant share repurchases, and maintain a disciplined financial profile.

While macroeconomic headwinds, particularly impacting consumer spending and amplified by potential tariff impacts, introduce near-term uncertainty reflected in the revised guidance, the underlying brand equity, operational efficiency initiatives, and strategic focus on high-growth segments provide a solid foundation. Investors should monitor the pace of recovery in consumer demand, the successful execution of the Wine and Spirits turnaround, and the impact of external factors like tariffs. Ultimately, Constellation Brands' ability to leverage its core strengths and execute its strategic priorities amidst a dynamic environment will be key to realizing its potential for continued industry outperformance and shareholder value creation.