STZ — Q2 FY2027 (quarter ended Aug 31, 2026) Financial Report Analysis

Constellation Brands, the US importer of Modelo, Corona and Pacifico, grew net sales 6% to $2,633.0 million in the second quarter of fiscal 2027 (the three months ended August 31, 2026). Reported (GAAP) earnings per share jumped 25% to $3.32, but almost none of that came from the business: pre-tax income actually fell 7%, and the EPS jump comes from a tax charge in last year's quarter that did not repeat. On the company's own "comparable" basis, which strips out one-off items, EPS rose 3% to $3.74, and all of that came from buying back shares. Beer sales grew because the company shipped 5.5% more cases to distributors, while the beer distributors sold on to stores fell 0.6%.

At a glance

• Beer shipments +5.5%, depletions -0.6%. Distributors bought far more beer than they resold, so this quarter's sales growth ran ahead of what drinkers actually bought.
• Comparable net income: $637.3 million vs $637.8 million. Underlying profit was flat; the 3% rise in comparable EPS comes from about 3% fewer shares outstanding.
• Full-year guidance unchanged at $11.20–$11.90 comparable EPS. After a first half of $7.16, that implies a second half roughly 5% to 19% weaker than last year's.

Results at a glance

"Comparable" figures are the company's non-GAAP measures, which exclude items it treats as unrelated to ongoing operations (impairments, restructuring, mark-to-market swings on commodity hedges, and some tax items).

Takeaway: Constellation's beer brands held up better than the US beer market in Q2, but the sales growth was largely distributors restocking: shipments rose 5.5% while depletions fell 0.6%. Underlying profit was flat, and by leaving full-year guidance unchanged after a strong first half, management is signalling a weaker second half as shipments fall back in line with demand.

Beer: shipping ahead of demand

Constellation tracks two volume measures. Shipments are cases it sells to its distributors and are what drives reported sales. Depletions are cases those distributors sell on to stores, bars and restaurants, which is closer to what consumers are buying. In Q2 the two moved in opposite directions: shipments rose 5.5% to 123.9 million cases, depletions fell 0.6%. For the first half, shipments are up 3.7% and depletions down 0.5%. The company notes one extra selling day in the quarter, which it says was "largely offset" by the timing of the Labor Day holiday, so the calendar does not explain the gap.

By brand, depletions fell about 2% for Modelo Especial and about 5% for Corona Extra, the two largest brands. Pacifico (+19%), Victoria (+15%) and the Modelo Chelada brands (+5%) grew. The company says it was the #1 dollar and volume share gainer in Circana-tracked US channels, outperforming the total beer category by 4 percentage points in dollar and volume sales. So the category is shrinking, and Constellation is shrinking less than the category.

Beer net sales rose 5.5% to $2,473.6 million, "driven by a 5.5% increase in shipment volumes." Segment gross margin improved from 52.9% to 54.1%, helped by lower tariff expenses and better fixed-cost absorption (the breweries ran fuller, so each case carried less fixed cost). But beer operating margin fell 1.6 points to 39.0%, because the company spent more on marketing and other selling and administrative costs. Beer operating income rose just 1% to $964.2 million on 5.5% more sales.

Wine & Spirits: small, but finally profitable

After selling its mainstream wine brands in June 2025, Wine & Spirits is now about 6% of net sales. Net sales rose 17% to $159.4 million on 15.4% higher shipments, and depletions rose 10.2%, led by Kim Crawford (about +11%) and Mi CAMPO tequila (about +51%). Because the divestiture closed before this quarter last year, the quarter's growth is fully organic. The segment swung from a $19.8 million operating loss to $6.1 million of operating income (a 3.8% margin), which the company attributes to "recoveries of U.S. tariffs" in cost of goods and savings in marketing and overhead from its restructuring program.

What the headline numbers hide

• The GAAP EPS jump is a tax comparison. Pre-tax income fell 6.8% to $729.4 million. The effective tax rate dropped from 37.9% to 20.2% because last year's quarter carried a $192.1 million charge to increase valuation allowances (a write-down of tax assets the company no longer expected to use). Tax expense fell from $296.8 million to $147.1 million, which more than covers the drop in pre-tax profit.
• What comparable results exclude this quarter. The $91.6 million of operating items excluded from comparable results include $49.8 million of impairments on the Nelson's Green Brier whiskey business, which management plans to sell, $17.9 million of "strategic business reconfiguration" costs (including a loss on settling a receivable from a previously sold facility), $4.9 million of restructuring, $4.6 million of transition-services costs for the buyers of the sold wine brands, and an $11.4 million net loss on commodity hedges. That is why GAAP operating income fell 8% while comparable operating income rose 1% to $896.6 million.
• All comparable EPS growth came from buybacks. Comparable pre-tax income rose 1.8%, but the comparable tax rate rose from 18.5% to 20.4%, leaving comparable net income flat at $637.3 million. Diluted shares fell 3.0% (170.6 million vs 175.9 million), which turns flat profit into 3% EPS growth. The company repurchased $454.7 million of stock in the first half ($530 million through September).
• Costs grew faster than sales. Selling, general and administrative expenses rose 23% to $538.2 million against 6% sales growth. Management describes this as deliberate "increased investment" in marketing; it is why comparable operating margin fell 1.6 points even as gross margin held. Corporate costs rose to a $73.7 million loss from $45.6 million.
• Cash conversion is solid. First-half operating cash flow was $1,478.6 million against net income of $1,254.2 million (1.2x), and free cash flow (operating cash flow minus capital spending) rose 4% to $1,124.5 million, helped by $56 million less capital spending. Inventories fell from $1,433.9 million in February to $1,378.6 million; receivables rose a modest 3% to $678.1 million, so no sign of sales being pushed out on extended credit. Total debt fell by about $253 million to $10.3 billion.
• Guidance: comparable reaffirmed, reported raised. The comparable EPS range ($11.20–$11.90), beer sales growth of -1% to +1%, and free cash flow of $1.6–$1.7 billion are unchanged. The reported EPS outlook was updated to $11.85–$12.55, above the comparable range mainly because of an expected $1.10-per-share tax benefit from reducing valuation allowances, which comparable EPS excludes.

Did last quarter's read hold up?

Our fiscal 2026 analysis flagged three things for fiscal 2027. First, the 10-K said beer shipments should "generally align with depletion volume." So far they have not: first-half shipments are running about 4 points ahead of depletions. Second, it noted that malt beer had been removed from the Section 232 aluminum tariffs in April 2026; this quarter's release cites "lower tariff expenses" as a beer margin tailwind, so that relief has started to show up. Third, it pointed to Wine & Spirits margin guidance of 5–6%. The segment reached 3.8% in Q2 but only 1.6% for the first half, so the second half needs to do better to hit the range.

Outlook

Management's fiscal 2027 guidance (year ending February 28, 2027), reaffirmed in this release:

• Comparable EPS of $11.20–$11.90, against $11.82 in fiscal 2026; reported EPS of $11.85–$12.55.
• Beer net sales growth of -1% to +1%; Wine & Spirits organic net sales of -1% to +1%.
• Comparable operating margin of 32–33% (beer 37–38%, Wine & Spirits 5–6%).
• Operating cash flow of $2.4–$2.5 billion, capital spending of about $800 million, and free cash flow of $1.6–$1.7 billion.

Subsequent to the quarter, the company bought SpikedAde, a vodka-based sports-drink-flavored ready-to-drink brand, for $75 million upfront plus up to $278 million of performance-based payments over five years. It says the deal does not change the outlook. The board declared a quarterly dividend of $1.03 per share.

Our read. The unchanged guidance says more than the quarter. Beer net sales grew 3.9% in the first half ($4,757.1 million vs $4,579.5 million). Using fiscal 2026 beer net sales of $8,315.2 million from the 10-K, full-year growth of -1% to +1% implies second-half beer sales roughly 2.5% to 7% below last year's. Similarly, first-half comparable EPS of $7.16 against the full-year range implies roughly $4.04–$4.74 for the second half, versus about $4.98 a year ago (these halves are approximate, since share counts change through the year). Both point the same way: management expects shipments to fall back toward depletions, which are still slightly negative, while marketing spending stays high. The share gains in Pacifico and Victoria are real, but they have not yet offset declines in Modelo Especial and Corona Extra. Until depletions turn positive, beer revenue growth that comes from distributors restocking is likely to reverse later in the year. The 10-Q, not yet filed, should give the price, volume and mix breakdown behind beer's net sales growth.