Published
# Constellation Brands, Inc. (STZ): Business Narrative, Fiscal 2027 Second Quarter
Constellation's fiscal year ends on the last day of February. Fiscal 2026 ended February 28, 2026. Fiscal 2027 runs from March 1, 2026 to February 28, 2027, so its second quarter is June through August 2026.
Sources:
- **Business, Risk factors and the fiscal 2026 MD&A** come from the Annual Report on Form 10-K for fiscal 2026 (accession 0000016918-26-000011, filed April 22, 2026).
- **Current quarter and Subsequent events** come from the Form 10-Q for the quarter ended August 31, 2026 (accession 0000016918-26-000040, filed October 7, 2026), with outlook and brand-level detail from the second-quarter earnings release furnished on Form 8-K (accession 0000016918-26-000039, filed October 6, 2026).
All amounts are in US dollars.
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## Business
*From the fiscal 2026 Form 10-K, accession 0000016918-26-000011.*
Constellation Brands sells beer, wine and spirits, mostly in the United States. Most of the business is Mexican-brewed imported beer: Modelo, Corona, Pacifico and Victoria. In fiscal 2026 the Beer segment produced $8,315.2 million of the company's $9,139.0 million in net sales, about 91%. The remaining $823.8 million came from a smaller wine and spirits business that now carries only higher-end brands ($700.4 million wine, $123.4 million spirits). Constellation sells mainly to wholesale distributors, which resell to retailers. In states where the government is the distributor, it sells to state alcohol beverage control agencies. One distributor group, the Reyes Beer Division entities, accounted for 27.5% of fiscal 2026 net sales, and the 10 largest customers for about 60%.
Constellation holds an exclusive, perpetual sub-license to the trademarks of its beer brands in the U.S. It brews the beer itself in Mexico and has the exclusive right to import, market and sell it in all 50 states. It describes itself as the second-largest U.S. beer company and the #1 brewer and seller of imported beer in the U.S. Modelo Especial is the best-selling U.S. beer by dollar sales.
The company reports three segments:
- **Beer.** High-end imported beer and "ABAs" (flavored malt beverages and similar alternatives). The Modelo family includes Modelo Especial, Modelo Chelada, Modelo Negra, Modelo Oro, Modelo Noche Especial and Modelo Spiked Aguas Frescas. The Corona family includes Corona Extra, Corona Familiar, Corona Light, Corona Premier, Corona Non-Alcoholic and Corona Sunbrew. Pacifico and Victoria (including Vicky Chamoy) complete the core brands, and the segment also sells Austin Cocktails and HOPWTR. In fiscal 2026 Modelo Especial was the best-selling beer overall and Corona Extra was the second-largest imported beer and fifth best-selling beer overall. Pacifico and Victoria were the two fastest-growing major imported beer brands.
- **Wine and Spirits.** A portfolio repositioned to exclusively higher-end brands, including:
- Wine: Kim Crawford, Ruffino, The Prisoner Wine Company, Robert Mondavi Winery, Mount Veeder, Sea Smoke, Schrader Cellars and My Favorite Neighbor.
- Spirits: Casa Noble, Mi CAMPO, High West and Nelson's Green Brier.
The segment sells mainly in the U.S., and also in Australia, Canada, Italy, New Zealand and other markets. Constellation consolidated its U.S. wine and spirits distribution with Southern Glazer's Wine and Spirits, which carries nearly 70% of U.S. branded wine and spirits volume and accounted for 6.7% of fiscal 2026 net sales.
- **Corporate Operations and Other.** Unallocated corporate costs and investments, including the corporate venture capital portfolio and the company's stake in Canopy Growth (26.3 million exchangeable shares).
**Production and supply.** All of the beer is brewed at two Mexican breweries, Nava and Obregón. A third brewery is under construction in Veracruz. These "modular capacity additions" are the company's main capital project: more than $700 million was spent on them in fiscal 2026, and the 10-K planned about $800 million of fiscal 2027 capital spending, almost all on the breweries.
- **Glass and cans.** Packaging is the largest production cost for beer, and glass bottles are the largest packaging cost. A 50/50 joint venture with Owens-Illinois runs a glass plant next to the Nava brewery, which supplies about 60% of the beer brands' bottles. Two can makers supply all of the beer brands' aluminum cans.
- **Wine and spirits facilities.** As of February 28, 2026, Constellation operated nine U.S. wineries (Napa, Sonoma, Central Coast, and Oregon's Willamette Valley), two in New Zealand, six in Italy, and three U.S. distilleries. It owned, leased or had interests in about 6,300 acres of vineyards in New Zealand, 2,300 in the U.S. and 1,400 in Italy.
- **Seasonality.** Beer sales peak in the first and second fiscal quarters (spring and summer). Wine and spirits sales peak in the third quarter (holidays).
**Competition and people.** The main beer competitors are Anheuser-Busch InBev, Molson Coors, Heineken, Boston Beer and Mark Anthony. In wine they include GALLO, Treasury Wine Estates, The Wine Group, Duckhorn Portfolio and Deutsch Family. In spirits they include Diageo, Brown-Forman, Bacardi USA, Pernod Ricard, Sazerac and Suntory Global Spirits. Constellation had about 9,400 employees at fiscal 2026 year-end, including about 1,100 at the glass joint venture. About 20% are covered by collective bargaining agreements. Nicholas Fink, formerly CEO of Fortune Brands and a Constellation director since January 2021, became President and Chief Executive Officer on April 13, 2026.
**Strategy.**
- **Beer:** defend U.S. high-end beer leadership through distribution gains, price-pack architecture and innovation. Fiscal 2026 launches included Corona Sunbrew, Modelo Chelada Limón y Sal non-alcoholic and the seasonal Modelo Noche Especial. Modelo Chelada Suprema launched in fiscal 2027.
- **Wine and spirits:** expand the smaller higher-end portfolio through U.S. wholesale, international and direct-to-consumer channels.
- **Fiscal 2027 growth pillars:** in the fiscal 2027 10-Q the company groups its growth plans into three pillars: sustaining its scaled brands, scaling "next wave" brands, and diversifying with discipline into new demand spaces through organic growth plus targeted acquisitions.
Constellation is a Delaware corporation incorporated in 1972, successor to a business founded in 1945, and is headquartered in Rochester, New York. Its Class A stock trades on the NYSE as STZ.
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## Risk factors
*Condensed from Item 1A of the fiscal 2026 Form 10-K, accession 0000016918-26-000011.*
- **Concentration in U.S. beer.** Sales of the beer brands in the U.S. are "the vast majority" of the business. The company names several forces that could cut consumption:
- reduced discretionary income and value-seeking consumers;
- moderation and health concerns, including alcohol cancer-risk warnings;
- GLP-1 weight-loss drugs;
- substitution by cannabis or hemp products;
- changes in immigration laws and enforcement affecting consumers, particularly Hispanic consumers.
- **Tariffs and trade.** The beer is made in Mexico and sold in the U.S., so U.S.–Mexico trade policy is a direct exposure. The 10-K cites:
- U.S. tariffs on aluminum and aluminum derivatives, which added $58.3 million to Beer cost of product sold in fiscal 2026, largely under Section 232;
- the ongoing review of the U.S.-Mexico-Canada Agreement;
- Canadian provincial restrictions on U.S. alcohol;
- U.S. tariffs on other imports from countries including Mexico, Italy and the rest of the European Union, and New Zealand;
- refund and litigation questions after the U.S. Supreme Court invalidated tariffs imposed under IEEPA.
In April 2026 the U.S. removed beer made from malt from the scope of the Section 232 aluminum tariffs.
- **Few production sites.** All the beer comes from the company's Mexican breweries, and most of the beer bottles come from one glass plant. Brewery disruption, rail or freight problems, or a prolonged closure of the U.S.–Mexico border could leave the company unable to supply its beer, with no ready alternative source. The brewery expansion carries risks of delays, cost overruns, impairments and excess capacity. The company points to:
- prior impairments at the canceled Mexicali brewery;
- a $57.7 million loss in fiscal 2026 on dismantling and abandoning aged assets at Obregón.
- **Water and inputs.** The breweries draw on separate aquifers. Mexico recently reformed its water-rights laws, prohibiting transfers of water concessions between private parties and eliminating the private secondary market for them. Supply is also concentrated:
- two can suppliers, one of which provides most of the beer brands' cans;
- one producer supplying most of the glass for U.S. wine and spirits.
- **Distributor concentration.** One beer wholesaler, through multiple entities, represents about one-quarter of consolidated net sales. One exclusive wholesaler generates a large portion of branded U.S. wine and spirits sales. Losing or underperforming such a customer could disrupt sales.
- **Leadership transition.** Nicholas Fink became CEO on April 13, 2026. The company warns that the onboarding could change strategy, operations or workforce and disrupt the business.
- **Deals and impairments.** Acquisitions, divestitures and investments may not deliver. Divestitures can leave stranded costs and indemnification obligations. The company has already recognized large impairments on Wine and Spirits assets and on Canopy-related investments, and it holds significant goodwill and trademarks that could be impaired again. Wine and spirits faces ongoing category deceleration, and its long-term growth plan may not succeed.
- **Debt and rates.** Total debt was $10,568.5 million at fiscal 2026 year-end, and some notes maturing over the next several years carry rates below today's elevated levels. The credit agreement requires a minimum interest coverage ratio of 2.5x and a maximum net leverage ratio of 4.0x. It also bars the company from using loan proceeds to fund, or repaying the loans with proceeds from, Canopy, and from converting its Canopy exchangeable shares before a defined conversion time.
- **Tax.** The OB3 Act is expected to raise the fiscal 2027 effective tax rate. Pillar Two minimum taxes and proposed excise-tax increases on alcohol are further exposures.
- **Cost programs.** The 2025 Restructuring Initiative and other efficiency programs may not deliver the targeted savings on schedule.
- **Litigation.** A putative securities class action filed in February 2025 alleges misleading statements, now centered on the prospects of the beer business. Related derivative suits are stayed. The company also faces product-liability, marketing and labeling claims.
- **Operations and reputation.** Other risks include:
- wildfire, drought and frost exposure in California, Oregon and New Zealand;
- product contamination and recalls;
- cyberattacks and the risks of AI adoption;
- labor actions;
- reputational harm, including from its cannabis investment.
- **Governance.** Until November 2027, while the Sands family stockholders together own at least 10% of the Class A stock, the Board must nominate two WildStar-designated directors, and one at lower ownership thresholds. Some family members have pledged shares to secure loans, and a forced sale could pressure the stock. The bylaws make Delaware courts the exclusive forum for certain stockholder suits.
- **Capital returns.** Dividends and buybacks are discretionary and could be cut or suspended. Repurchases carry a 1% excise tax.
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## Management's discussion: fiscal 2026
*From Item 7 of the fiscal 2026 Form 10-K, accession 0000016918-26-000011. Fiscal 2026 ended February 28, 2026, and comparisons are with fiscal 2025.*
Fiscal 2026 was a year of shrinkage on the top line and repair below it:
- **Net sales** fell 10% to $9,139.0 million from $10,208.7 million. The causes were the sale of most mainstream wine brands, a beer volume decline, and lower organic wine sales.
- **Operating income** rose to $2,721.4 million from $354.9 million, because fiscal 2025 had absorbed $2,797.7 million of Wine and Spirits goodwill and trademark impairments.
- **Net income attributable to Constellation** was $1,686.7 million, against a loss of $81.4 million in fiscal 2025.
**Portfolio reshaping.** On June 2, 2025, Constellation sold, and in some cases exclusively licensed, the trademarks of its mainstream wine brands, together with the related inventory, wineries, vineyards and facilities. It received $845.9 million in cash and used it to repay debt. This followed the January 2025 sale of SVEDKA for $409.2 million. "Organic" figures in the company's discussion exclude both deals.
**Beer.**
- **Sales and volume.** Net sales fell 3% to $8,315.2 million. Shipments fell 3.8% to 415.4 million cases and depletions (distributor sales to retailers) fell 2.1%. Lower volume cost $323.0 million and unfavorable package mix $29.8 million, partly offset by $128.2 million of pricing. Management attributed the weakness to economic uncertainty and socioeconomic factors affecting consumers.
- **Gross profit** fell 4% to $4,361.5 million. Cost of product sold rose $149.5 million, driven by:
- $58.3 million of tariffs, mostly on aluminum;
- $58.2 million of unfavorable fixed-cost absorption from lower production;
- $14.6 million of higher brewery costs.
Procurement and logistics initiatives delivered more than $200 million of net benefit, partly offsetting these costs.
- **Operating income** fell 7% to $3,161.0 million, as lower volume and higher costs, including aluminum tariffs, outweighed efficiency savings and pricing.
**Wine and Spirits.** Net sales fell 51% to $823.8 million:
- **Divested brands:** $711.2 million of the decline.
- **Organic decline of $133.9 million**, made up of:
- $43.0 million from lower volume;
- $38.9 million from mix;
- $30.0 million from lower contractual distributor payments;
- $17.6 million from price cuts on certain brands.
Organic shipments fell 6.7% and depletions 4.3%. The company also cited U.S. and retaliatory tariffs. Segment operating income was $10.5 million, against $325.1 million in fiscal 2025.
**Margins and below the line.**
- **Gross margin** slipped to 51.6% from 52.1%. Higher beer costs (185 basis points) were mostly offset by shedding lower-margin wine brands (about 110 basis points) and beer pricing (75 basis points).
- **SG&A** rose to 20.2% of net sales from 19.1%.
- **Non-segment charges ("Comparable Adjustments")** reduced operating income by $221.8 million in total. They included:
- $109.8 million of asset impairment and related expenses, including the Obregón write-off;
- $72.2 million of restructuring costs;
- $35.7 million of transition-services costs;
- a $31.9 million net loss on sale of business.
- **Interest expense** fell 14% to $352.6 million on about $805 million lower average borrowings.
- **Effective tax rate** was 26.1%, against 62.4% in fiscal 2025.
**2025 Restructuring Initiative.** This enterprise-wide program is expected to yield more than $200 million of net annualized savings by fiscal 2028 at nearly $130 million of total pre-tax cost. It cost $72.2 million in fiscal 2026 and $121.9 million cumulatively by year-end.
**Cash and capital.**
- **Cash generation.** Operating cash flow was $2,669.0 million, against $3,152.2 million. Capital expenditures were $875.0 million, of which $762.4 million was in Beer.
- **Shareholder returns.** Dividends paid were $715.7 million. The company repurchased 5,652,107 shares for $924.1 million under a $4.0 billion authorization from April 2025, which expires in February 2028.
- **Debt.**
- Total debt fell $929.2 million to $10,568.5 million.
- New issues: 4.80% notes in May 2025 and 4.95% notes in October 2025, about $495 million net each.
- Retirements: the 5.00% February 2023 notes and 4.75% December 2015 notes were redeemed, and the 4.40% October 2018 notes were repaid at maturity.
- The $2.25 billion revolving credit facility was refinanced and extended to April 28, 2030.
**Fiscal 2027 expectations in the 10-K:**
- Beer shipments to roughly match depletions.
- Wine and spirits depletions to outpace shipments as distributors cut inventory under agreed reductions.
- Capital spending of about $800 million.
- About $700 million of dividends.
- An effective tax rate of 19% to 21%, later revised (see below).
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## Current quarter: second quarter of fiscal 2027 (three months ended August 31, 2026)
*From the Form 10-Q, accession 0000016918-26-000040, and the earnings release furnished on Form 8-K, accession 0000016918-26-000039.*
**Headline.**
- **Net sales** rose 6% to $2,633.0 million, as both businesses shipped more volume.
- **Operating income** fell 8% to $805.0 million. A $49.8 million impairment on Nelson's Green Brier, heavier marketing and higher incentive-compensation accruals outweighed the volume growth, lower tariffs and cost savings.
- **Net income attributable to Constellation** rose 21% to $565.8 million, and diluted EPS rose 25% to $3.32 from $2.65. The main driver was a much lower tax charge: the effective rate fell to 20.2% from 37.9%, mainly from changes to valuation allowances.
- **Comparable results.** The company's comparable (non-GAAP) operating income rose 1% to $897 million and comparable EPS 3% to $3.74.
**Beer.**
- **Sales and volume.** Net sales rose 5% to $2,473.6 million on a 5.5% rise in shipments to 123.9 million cases. The 10-Q attributes the shipment growth to distributors rebuilding inventory days-on-hand, while depletions fell 0.6%. Volume added $130.2 million and pricing $12.8 million, offset by $14.4 million of unfavorable package mix.
- **Brands.** According to the release, Modelo Especial depletions fell about 2% and Corona Extra about 5%. Pacifico grew about 19%, Victoria about 15% and the Modelo Chelada brands about 5%. The release says the beer business was the #1 dollar and volume share gainer in Circana-tracked U.S. channels.
- **Gross profit** rose 8% to $1,337.7 million. Cost of product sold fell $33.9 million, helped by:
- $24.1 million of lower tariffs, largely on aluminum imports under Section 232;
- $23.3 million of better fixed-cost absorption;
- $9.4 million of lower depreciation.
Warehousing, obsolescence and materials costs partly offset these gains.
- **SG&A and operating income.** Beer SG&A jumped 30% to $373.5 million, with $54.5 million more marketing and $30.7 million more general and administrative expense. Beer operating income therefore rose only 1% to $964.2 million, and the release puts the operating margin at 39.0%, down 160 basis points.
**Wine and Spirits.** Net sales rose 17% to $159.4 million, on shipments up 15.4% and depletions up 10.2%. The release cites growth of about 11% at Kim Crawford and about 51% at Mi CAMPO. Price actions on select brands helped volume. The segment earned $6.1 million of operating income, against a $19.8 million loss a year earlier, helped by the volume growth, recoveries of U.S. tariff claims and restructuring savings.
**Corporate.** The Corporate Operations and Other loss widened to $73.7 million from $45.6 million, mainly on higher incentive-compensation accruals.
**Margins.** Gross margin was 52.9%, against 52.8%. SG&A rose to 20.4% of net sales from 17.6%.
**First half of fiscal 2027 (six months ended August 31, 2026):**
- Net sales rose 1% to $5,065.7 million. Beer grew 4% to $4,757.1 million. Wine and Spirits fell 26% to $308.6 million because of the 2025 divestiture, despite organic shipment growth of 11.5%.
- Operating income rose 4% to $1,650.3 million.
- Net income attributable to Constellation rose 24% to $1,219.6 million, and diluted EPS rose to $7.11 from $5.55.
- Operating cash flow was $1,478.6 million, against $1,489.3 million, and capital spending fell to $354.1 million from $410.1 million. The release reports non-GAAP free cash flow of $1.1 billion, up 4%.
- The company repurchased 3,169,666 shares for $454.7 million and paid $353.8 million of dividends.
- Total debt was $10,315.7 million at August 31, 2026, down $252.8 million from February.
**Portfolio and capacity changes during the half.**
- **HOPWTR:** in April 2026 Constellation bought the remaining interest in HOPWTR, a non-alcoholic hop-water brand it had held through its venture portfolio since 2021. HOPWTR now reports in Beer.
- **New Zealand wine:** in June 2026 it sold eight small, domestic-market New Zealand mainstream wine brands, with inventory, equipment, a winery and vineyards. It took an $18.3 million impairment in the first quarter ahead of the sale.
- **Nelson's Green Brier:** management plans to divest this Tennessee craft bourbon and whiskey business. Its assets were written down from $54.8 million to an estimated fair value of $5.0 million in the second quarter.
- **Veracruz brewery:** the 10-Q now expects commercial production to begin at the start of fiscal 2028. The fiscal 2026 10-K had expected initial production around the middle of fiscal 2027.
- **Financing:** in May 2026 Constellation issued $500.0 million of 4.85% senior notes due May 2031 ($496.7 million net). On May 18, 2026 it redeemed $600.0 million of 3.70% December 2016 senior notes.
**Outlook for fiscal 2027 (earnings release of October 6, 2026).**
- **EPS:**
- Reported EPS guidance was raised to $11.85–$12.55, from $11.50–$12.20 in June and $11.10–$11.80 in April.
- Comparable EPS guidance of $11.20–$11.90 was reaffirmed. Fiscal 2026 actuals were $9.61 reported and $11.82 comparable.
- **Sales:** organic net sales growth of –1% to +1% for the enterprise, for Beer, and for organic Wine and Spirits.
- **Margins:**
- Reported enterprise operating margin was lowered to 31%–32%, from 32%–33% in June. The comparable margin stays at 32%–33%.
- Beer operating margin of 37%–38%.
- Wine and Spirits operating margin of 5%–6%.
- **Tax:** a reported tax rate of about 12% and a comparable rate of about 20%. The 10-Q puts the reported effective tax rate at 11%–13%, including the expected valuation-allowance benefit described below.
- **Cash:** operating cash flow of $2.4–$2.5 billion, capital expenditures of about $800 million, and free cash flow of $1.6–$1.7 billion.
The release says the SpikedAde acquisition does not change this outlook. The 10-Q expects Beer shipments to roughly match depletions for the year, and Wine and Spirits shipments to fall in the second half as agreed distributor inventory reductions continue. At August 31, 2026, the company had hedged 89% of forecast foreign-currency exposures and about 90% of forecast commodity exposures for the rest of fiscal 2027.
**Litigation update.** The court heard oral argument on the motion to dismiss the securities class action on July 22, 2026, and the motion remains pending. The case is now captioned Low v. Constellation Brands, Inc., et al.
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## Subsequent events
*From the subsequent-event notes (Notes 6, 8, 9 and 10) and MD&A of the Form 10-Q, accession 0000016918-26-000040, with deal detail from the October 6, 2026 Form 8-K, accession 0000016918-26-000039.*
The following occurred after the August 31, 2026 quarter end:
- **SpikedAde acquisition (October 2026).** Constellation bought 100% of SpikedAde for $75 million paid at closing. SpikedAde is a spirit-based ready-to-drink brand that combines sports-drink flavors with a vodka base in a zero-sugar, 100-calorie, non-carbonated format. The agreement adds contingent consideration of up to $278 million over five years, depending on the brand's performance. SpikedAde will report in the Beer segment, and the company says it moves the portfolio into a new demand space within the ready-to-drink category.
- **New $300 million term loan facility (September 2026).** Constellation signed the 2026 Term Credit Agreement with M&T as administrative agent: a nine-month delayed-draw term loan of $300.0 million, available in up to two draws. Any amount drawn is due two years after the first draw and is intended for general corporate purposes, including debt repayment. No borrowings were outstanding under it as of the 10-Q.
- **Early redemption of $600 million of notes (September 18, 2026).** The company redeemed all $600.0 million of its 4.35% senior notes due 2027 at par plus accrued interest, funded with commercial paper. Commercial paper outstanding rose to $607.0 million at September 30, 2026 from $116.5 million at August 31. Available revolver capacity fell to $1,632.1 million from $2,122.6 million.
- **Expected tax benefit.** Because of foreign tax reform enacted in September 2026, Constellation expects to release part of its valuation allowance on deferred tax assets. It estimates an income tax benefit of about $100 million to $150 million in the quarter ending November 30, 2026.
- **Share repurchases.** After the quarter, Constellation repurchased 607,371 Class A shares for $75.0 million under a Rule 10b5-1 plan. $2,546.2 million remained under the $4.0 billion authorization at September 30, 2026.
- **Dividend.** On October 6, 2026 the Board declared a quarterly dividend of $1.03 per Class A share and $0.93 per Class 1 share. It is payable November 13, 2026 to holders of record on October 30, 2026.