Constellation Brands Earnings Call: Margins Up, Risks Rise

Constellation Brands ((STZ)) has held its Q3 earnings call. Read on for the main highlights of the call.

Constellation Brands Earnings Call Balances Margin Strength With Macro Headwinds

Constellation Brands’ latest earnings call painted a mixed but controlled picture: the company delivered stronger-than-expected Q3 beer margins and continued brand and distribution wins, yet management was candid about ongoing volume softness, pressure on Hispanic consumers, and rising cost headwinds that will weigh on Q4 margins and could challenge longer-term targets. Overall, the tone suggested confidence in what management can control—pricing, cost savings, and capacity execution—set against a cautious view of the broader macro environment and category demand.

Q3 Beer Margins Outperform on Cost Savings and Pricing

Q3 beer operating margins came in ahead of expectations, driven by ongoing cost-savings initiatives and disciplined pricing actions taken in both the spring and fall. Management also benefited from a favorable year-over-year depreciation timing impact in Q3, which temporarily boosted profitability. While this performance underscored the underlying earnings power of the beer business, executives warned that some of these benefits are timing-related and will reverse in Q4, limiting the sustainability of this quarter’s margin beat.

Pacifico and Broader Portfolio Show Strong Brand Momentum

Brand health across Constellation’s beer portfolio remained a clear bright spot. Pacifico continued its strong trajectory, now ranking as the #2 beer in California, skewing toward younger consumers and leading the category in social share of voice. The brand also gained 1.5 points of share in the on-premise channel. Management highlighted continued strength across other key labels, including Modelo, Victoria, Corona Sunbrew, and Corona Non-Alcoholic, underscoring that brand equity remains intact even as category volumes face pressure.

Distribution Gains Drive Share in Nearly Every State

The company delivered mid-single-digit distribution growth in the quarter and gained share in 49 of 50 states, reinforcing the reach and relevance of its beer portfolio. Management emphasized there is still considerable runway ahead: for example, Modelo still has roughly 20% fewer points of distribution than some large domestic competitors. This gap suggests that distribution expansion—not just pricing—can continue to support revenue and share gains even in a sluggish volume environment.

Depletions Soft but In Line With Expectations

Depletions, a key indicator of underlying demand, finished roughly in line with management expectations for December. Off-premise depletions were down about 2.9% in Q3 but still ran ahead of external retail-tracking benchmarks (Nielsen/Circana), indicating the brands are outperforming the broader market. For the full year, management expects depletions to be down around 2.5%–3%, confirming that while the category and volumes are under pressure, performance is tracking within the company’s planned range.

Disciplined Pricing and New Pack Strategies Support Demand

Pricing in Q3 averaged about 1.5%, and management reiterated its target of 1%–2% annual beer pricing going forward. Rather than relying solely on across-the-board price hikes, Constellation is leaning into tactical actions, such as price adjustments on Modelo Oro and Corona Premier, which have helped improve trends for those brands. The company is also investing in price pack architecture, including smaller 7-ounce pack offerings, to better meet consumer needs and maintain affordability, a key lever in a more cautious consumer environment.

Capacity Expansion and CapEx Strategy Move Forward

Management reaffirmed its plan to add roughly 7 million hectoliters of beer capacity through fiscal 2028, using a modular brewery-build approach designed to provide flexibility and efficiency. The company has already committed to long-lead brewery equipment, including investments tied to its Veracruz facility, but noted it will monitor macro and demand trends closely and defer additional commitments where possible. This approach aims to balance long-term growth readiness with prudent capital allocation.

Category and Volume Pressures Weigh on Growth

Despite margin and share wins, volumes remain under pressure. Full-year beer depletions are expected to be down about 2.5%–3%, and management described the overall beer category as challenged. This reflects not only broader category softness but also specific consumer headwinds, particularly among Hispanic shoppers, which are disproportionately important to Constellation’s core brands.

Hispanic Consumer Weakness Adds to Demand Volatility

The company highlighted ongoing weakness among Hispanic consumers, a key demographic for its Mexican beer portfolio. Management cited data indicating that roughly three-quarters of Hispanic consumers are very concerned about the socioeconomic environment. This has translated into spending caution, volatility, and localized softness in ZIP codes with higher Hispanic populations. While brand equity remains strong, this macro-driven pressure is dampening demand in some of Constellation’s most important markets.

Tariffs, Aluminum Costs and Packaging Mix Pressure Margins

Rising aluminum prices and a continuing shift in packaging mix toward aluminum cans and away from glass are emerging as meaningful cost headwinds. In addition, the timing and level of tariffs—especially related to aluminum—are expected to weigh further on margins, particularly in Q4. Management flagged these factors as structural pressures that will require continued cost discipline and pricing strategy to offset over time.

Seasonally Weak Q4 to Face Margin Headwinds

Q4 is Constellation’s smallest seasonal quarter, accounting for only about 20% of annual volume, which inherently amplifies fixed-cost absorption and compresses margins. On top of that seasonality, the company expects a reversal of the Q3 depreciation timing benefit into a Q4 headwind, as well as the impact of higher tariffs and the aluminum packaging mix shift. These factors, combined with lower volume, are set to make Q4 the weakest margin quarter of the year.

Logistics and Maintenance Costs Shift Into Q4

Beyond structural cost pressures, Constellation is also facing timing-related expense headwinds. Q3 already experienced some drag from tariffs, logistics, and brewery maintenance, but management noted that additional costs originally expected in Q3 have slipped into Q4. This expense phasing will further pressure near-term profit and adds to the margin volatility investors should expect in the second half.

Macro Uncertainty Clouds Long-Term Margin Targets

Management acknowledged that its prior long-term beer margin target of 39%–40% for FY27–28 was set under more favorable macro assumptions. Since then, the environment has worsened, particularly for core consumers and input costs. As a result, the company plans to reassess and update its FY27+ outlook in April, signaling potential downside risk to those earlier targets. While Constellation remains focused on efficiency and cost savings, it is not ignoring the reality that weaker demand and higher costs may constrain the pace of margin expansion.

Guidance and Outlook: Steady Near-Term, Reassessment Ahead

For now, Constellation is maintaining its full-year FY26 guidance, reflecting management’s confidence in its near-term plan despite the tougher backdrop. Q4 is expected to remain seasonally small at about 20% of annual volume, with shipments and depletions largely aligned across the second half and depletions trending roughly down 2.5%–3% for the year (including a 2.9% off-premise decline in Q3, with December in line with expectations). Beer pricing guidance is unchanged at 1%–2%, capacity plans still call for roughly 7 million additional hectoliters through FY28, and current CapEx commitments linked to Veracruz and long-lead equipment remain intact. However, management reminded investors that its prior goal for FY27–28 beer operating margins of 39%–40% will be revisited in April, as weaker macro conditions, higher aluminum-related tariffs, a continued shift toward aluminum packaging, and timing-related expenses weigh on the near-term margin outlook.

In summary, Constellation Brands’ earnings call underscored a business that continues to execute well on the levers it controls—pricing, cost savings, brand building, distribution expansion, and capacity planning—while acknowledging real volume and macro headwinds. Strong Q3 margins and share gains show the resilience of its core beer portfolio, but persistent pressure on key consumers, rising input costs, and Q4 margin headwinds temper the near-term picture and raise questions about longer-term margin targets. Investors will be watching the company’s April update closely to see how management recalibrates expectations in light of this changing environment.