P&G, Constellation Brands see solid U.S. demand, even as prices rise — a key reason we're shareholders

Published Fri, Feb 24 202312:13 PM EST

Club holdings Procter & Gamble (PG) and Constellation Brands (STZ) see resilient U.S. consumer demand despite persistent inflation, top executives at both companies said Thursday — highlighting our view that alcohol and staples like toothpaste don't go out of fashion, even in uncertain economic times. Speaking at the Consumer Analyst Group of New York Conference 2023, Constellation CEO Bill Newlands said American demand for the company's high-end Mexican beer portfolio remains strong, while P & G CEO Jon Moeller called U.S. shoppers "more robust" than those in other parts of the world. The comments from both chief executives come amid fresh signs Americans are opening their wallets at the start of the year, even as prices continue to rise. U.S. retail sales rose 3% month-on-month in January, far outpacing the Dow Jones estimate of a 1.9% increase, the Commerce Department said last week. At the same time, the department on Friday said its personal consumption expenditures price index — the Federal Reserve's preferred metric of inflation — climbed 0.6% in January. Constellation Brands "Consumer demand for our products remains strong even in a challenging macro environment," Newlands said. He touted "tremendous" growth across Constellation's beer, wine and spirits categories, calling the portfolio "incredibly well-positioned" in a slower economy. U.S.-based Constellation's Mexican beers include Modelo Especial, Corona and Pacifico. It also distributes a range of other high-quality alcoholic brands, such as Svedka vodka and Kim Crawford sauvignon blanc. Still, investors had recently been concerned over volatility in Constellation's fast-growing core beer brand, Modelo Especial. Newlands said beer depletion grew by more than 6% throughout December and January, ahead of the depletion rate the quarter prior, but added there had been a "rebound in volume growth" over the last several weeks. The CEO acknowledged that inflationary pressures will likely be present in the company's fiscal years 2023 and 2024. But said he expects operating margins in its beer business "just slightly below the medium-term range, which are still best in class margins in our industry." In its third quarter of fiscal 2023, Constellation's beer operating margin took a 380-basis-point hit compared with the year prior, falling to 37.5%, due to an increase in the cost of raw materials, packaging and logistics. Newlands on Thursday also said Constellation should see top-line beer growth between 7% to 9% in fiscal 2023 and 2024 — below the implied beer sales growth of 9% to 10% this fiscal year that the company guided for last month. Shares of Constellation were down around 0.8% Thursday morning, trading around $223.75 each. Procter & Gamble Inflation continues to weigh on consumers and impact global sales volumes at P & G, CFO Andre Schulten said Thursday. But he added that consumer health varies by region. Consumers in the U.S. — P & G's largest market— are the most resilient spenders, whereas demand is softer in Europe due to higher inflation and geopolitical conflict. In China, the company's second largest market, consumer activity has been weaker over the past three years as a result of Covid-19 lockdowns and other restrictions. But given Beijing's recent pivot to abandon its zero-Covid policy, Schulten expects the Chinese market to recover in the coming quarters. Procter & Gamble, whose high-quality and well-known consumer brands include Crest, Tide, Pampers and Gillette, has been able to weather economic volatility through "strong pricing execution," Schulten added. P & G last month delivered solid fiscal second-quarter results , in part through raising prices by as much as 10% on some products. CEO Moeller said Thursday that "superiority is critical in an inflationary environment, as consumers face increased pressure on every aspect on their household budgets," Moeller said. "We're investing in truly delivering superior value." Last month, Moeller told CNBC that inflation appears to be easing and pressure from a strong U.S. dollar abating . A stronger U.S. dollar makes the goods of an American multinational like P & G more expensive abroad, which has weighed on earnings. Shares of P & G were trading down more than 1% Thursday morning, at $138.48 apiece. The Club take Despite short-term concerns over weaker consumer demand in some regions globally, P & G is offsetting that pressure with higher pricing and continued innovation in its superior line-up of products. It's also benefiting from a steady U.S. consumer, who's willing to spend on high-quality essentials regardless of the uptick in prices. As the company's input costs come down and the dollar likely continues to lose value, we expect to see P & G's profit margins expand in fiscal 2023. Constellation Brands, meanwhile, continues to demonstrate sustained demand for its leading beer brands. While Modelo Especial saw volume declines, those depletions appear to be normalizing. And the beer brand remains a market-share gainer. Modelo Especial is the fastest-growing beer by sales in the U.S., holds the No. 1 spot in the country's high-end beer market and the No. 2 in the overall beer market. We also continue to back Constellation for its high free-cash-flow generation and its ability to raise prices, while consistently taking market share from competitors. (Jim Cramer's Charitable Trust is long STZ & PG. See here for a full list of the stocks.) 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Trucks with Constellation Brands Inc. Corona and Modelo beer sit during a delivery in the Zona Rosa neighborhood in Mexico City, Mexico.

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