People are buying less beer made by Molson Coors Brewing Co. and investors are taking note.
The company reported fourth-quarter declines on Tuesday in nearly every sales metric, across nearly every geographic market. Revenue of US$2.42-billion missed analyst expectations by nearly 5 per cent.
The company’s “brand volume” – which counts only the company’s owned brands, not wholesale, contracting or importing businesses – fell 5.1 per cent in the U.S., the market where it gets two-thirds of its sales. In Canada, brand volume decreased 2.0 per cent, with the company citing “the West and Ontario, partially offset by growth in Quebec.”
Molson Coors had been one of the top-performing beverage stocks of the year, returning more than 16 per cent before Tuesday, but the dismal earnings announcement wiped out most of its 2019 gains. The company’s New York Stock Exchange-listed shares fell more than 9.4 per cent to close at US$59.19. A thinly traded issue on the Toronto Stock Exchange, Molson Coors Canada Inc., fell 5.1 per cent to close at $82.90.
The company continues to battle a broad trend in brewing: Consumers are shifting to wine and spirits, and younger drinkers prefer craft beers to cheaper legacy brands that often have less alcohol content and – in their view – less taste.
CEO Mark Hunter said on Tuesday that Molson Coors expects U.S. beer-industry volumes to continue declines, with the company’s answer to “accelerate our portfolio premiumization,” which means adding more of those craft beers and other products that sell above the “premium” price point of its Coors line. “We were dissatisfied with the 2018 top line and share performance,” he said.
Tuesday’s earnings report was a textbook case of how an earnings “beat” can mean very little. The company’s earnings per share topped consensus, but it was mostly because the company’s tax rate came in roughly four to seven percentage points below what analysts were expecting.
The company also offered up guidance for free cash flow – a measure of how much cash the company will generate, after it makes capital expenditures in the business – of US$1.4-billion, plus or minus 10 per cent, which is about what it generated in 2018.
And, in a separate announcement, the company announced a restatement of its 2016 and 2017 financial results, and said its unaudited numbers from the first three quarters of 2018 also needed correcting. The company had made errors in accounting for tax liabilities from the acquisition of its MillerCoors joint venture. The adjustments cut US$399.1-million from 2016 net income but added US$151.4-million to 2017 earnings. The company said it now knows it had a material weakness in internal control, language that means the company’s procedures weren’t good enough to prevent a mistake that was large enough to be meaningful to investors.
Tuesday’s close brings Molson Coors’ share price about 20 per cent below the average analyst target price of US$71.79, according to Bloomberg. At least, for now – Goldman Sachs analyst Judy Hong said Tuesday morning she was putting her price target and earnings estimates under review based on the results.
Molson Coors is one of several legacy beverage or tobacco companies looking to cannabis as the next growth opportunity, with a joint venture with HEXO Corp. to produce cannabis-infused drinks in Canada when they become legal, assumed to be later this year. However, the company provided few new details Tuesday. Frederic Landtmeters, CEO of Molson Coors Canada, said “we’re on track to be ready on day one," but the company wouldn’t disclose how much it has invested in the joint venture.