Corona and Modelo Are Shrinking While Pacifico and Victoria Are Booming. Here's What That Means for Constellation Brands Stock.

Against a challenging backdrop for beer and alcohol stocks, Constellation Brands (NYSE:STZ) reported better-than-expected results in its second-quarter earnings report. However, the stock was trading flat on Wednesday morning, showing that investors are still concerned about headwinds in the beer industry.

The company, which is best known as the domestic seller of Corona and Modelo, reported organic revenue growth of 6% to $2.63 billion, which easily beat expectations at $2.54 billion.

However, looking under the hood, the growth numbers were not as strong as they might seem. Beer shipments, which measure sell-in to distributors and are recorded as revenue, rose 5.5%, while depletions, which better reflect consumer demand and measure sales from the distributor to the retailer, were down 0.6%. CEO Nicholas Fink explained that intentional distributor restocking to rebuild inventory drove the strong growth in shipments.

Its wine and spirits business, which is much smaller, saw strong growth in both shipments and depletions due to its efforts to reposition its portfolio around higher-end brands like Mi CAMPO tequila and Kim Crawford wines.

On the bottom line, the company reported adjusted earnings per share of $3.74, up 3% from a year ago, and ahead of the consensus at $3.55.

Constellation mostly reaffirmed its full-year guidance from the first quarter, calling for organic net sales between -1% and +1% and adjusted earnings per share of $11.20-$11.90, ahead of the consensus of $11.71.

However, there were some surprising changes in its beer sales mix.

Image source: Getty Images.

Are Corona and Modelo being replaced?

Modelo and Corona are the company's two biggest brands, but both saw depletion declines of 2% and 5%, respectively. The company blamed weak off-premise retail sales during the World Cup and headwinds from a broader pullback in consumer spending due to concerns about inflation.

However, the company did see strength in smaller brands like Pacifico, which jumped 19%, and Victoria, up 15%. Pacifico is now a top-10 beer brand in the U.S., and that growth continued a strong performance in the first quarter. Pacifico has become trendy among younger consumers, especially in beach and surf cultures, who are looking for an alternative to something like Corona, which has established itself as mainstream.

Victoria is much smaller, but its distribution expansion in states like Texas and California is promising as well. Finally, Modelo Chelada depletions were up 5%, showing the company is having success at spinning off its premier brand into new flavors.

What it means for Constellation Brands

While the weakness in Corona and Modelo is disappointing, the strength of those smaller brands meant the company gained 0.8% market share in the quarter, according to Circana, the largest share gain in the U.S.

Constellation can't control the broader market or general consumer demand, but that's a significant market share gain, and the strength of Pacifico bodes well for the company's future, as it could give it a third mega-brand.

I'd like to see the company get back to positive depletion growth in the beer business, but this is the most promising quarter we've seen from Constellation in some time.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.