A quarter with two volume numbers: reading Constellation Brands' second quarter from the filings

The short answer

The quarter reads well and the coverage has reported it accurately. Net sales rose 6 per cent to $2,633.0 million, diluted earnings per share rose 25 per cent to $3.32, and the company raised its reported earnings outlook. Three things sit in the filings underneath that and have not been reported.

First, the beer growth and the beer demand point in opposite directions in the same table. The 10-Q attributes $130.2 million of the $128.6 million increase in beer net sales to shipment volume as distributors sought to rebuild inventory days-on-hand, and states that we expect shipment volume to generally align with depletion volume for Fiscal 2027. The company's own guidance quantifies what that means: beer net sales growth of negative 1 to positive 1 per cent for the year, against 3.9 per cent already booked in the first half, requires second-half beer net sales to fall between 2.5 and 7.0 per cent, computed on filed figures.

Second, the 21 per cent rise in net income attributable to the company is the tax line. Pre-tax income fell $53.5 million and the provision for income taxes fell $149.7 million, the effective rate moving from 37.9 per cent to 20.2 per cent. At last year's rate this quarter's pre-tax income would have produced $436.5 million attributable to the company, computed, below the $466.0 million reported a year earlier. The filing then schedules a further $100 million to $150 million of tax benefit into the quarter ending 30 November 2026.

Third, the growth was bought. Beer net sales rose $128.6 million and beer segment operating income rose $12.6 million, an incremental margin of 9.8 per cent, computed, against an average of 39.0 per cent. Marketing rose $54.5 million and segment general and administrative expenses $30.6 million. Corporate general and administrative expenses rose 62 per cent.

None of this says the quarter was bad. Wine and spirits depletions rose 10.2 per cent and that segment returned to profit, tariff costs fell, and the restructuring is delivering. Section 9 sets out six things that run the other way.

1. What was filed, and in what order

Four documents carry this quarter, and the order matters because two of them landed before the results. A Form 8-K on 18 September 2026 disclosed a new term loan facility, and in the same week the company redeemed a $600.0 million senior note. A Form 8-K on 6 October 2026 carried the results as Exhibit 99.1 and an acquisition announcement as Exhibit 99.2. The Form 10-Q followed on 7 October 2026 and is the only one of the four that carries the notes.

The release is where the coverage came from and it is accurate. The 10-Q is where the quarter is explained, and the two documents do not emphasise the same things.

2. Two volume numbers in the same table, pointing opposite ways

The beer table in the release and in the 10-Q has four columns: shipments, depletions, net sales and operating income. For the quarter ended 31 August 2026 it reads 123.9 million cases against 117.4 million, 5.5 per cent higher; depletions down 0.6 per cent; net sales $2,473.6 million against $2,345.0 million; operating income $964.2 million against $951.6 million. Two of those four numbers are volume, and they disagree.

The 10-Q defines the second term precisely. Depletions represent U.S. distributor shipments of our respective branded products to retail customers, based on third-party data. Shipments are the company's revenue. Depletions are the demand.

Read the three periods together and the direction reverses. Through fiscal 2026 shipments ran below depletions: shipments fell 3.8 per cent while depletions fell 2.1 per cent, which is destocking. In the first half of fiscal 2027 shipments ran above depletions: shipments rose 3.7 per cent while depletions fell 0.5 per cent, which is restocking. The 10-Q says so in the sentence that explains the revenue line, attributing $130.2 million of the quarter's beer net sales increase to shipment volume as distributors sought to rebuild inventory days-on-hand. Pricing contributed $12.8 million and mix took $14.4 million away.

Restocking is a real sale, properly recognised, and finite. The 10-Q says where it ends: we expect shipment volume to generally align with depletion volume for Fiscal 2027. Alignment over a full year, after a first half in which shipments outran depletions by 8.5 million cases, computed, requires the second half to run the other way.

The fiscal 2027 outlook published on 6 October puts a number on it. Beer net sales growth is guided at (1)% - 1%. Fiscal 2026 beer net sales were $8,315.2 million, of which $4,579.5 million fell in the first half, leaving $3,735.7 million in the second. First-half fiscal 2027 beer net sales were $4,757.1 million, 3.9 per cent higher. Applying the guidance range to the full year and subtracting the first half gives the implied second half.

A second route reaches the same place. Fiscal 2026 beer shipments were 415.4 million cases, of which 228.7 million fell in the first half, leaving 186.7 million in the second. If full-year fiscal 2027 shipments align with depletions running at the first half's negative 0.5 per cent, full-year shipments would be about 413.3 million cases, computed, and with 237.2 million already shipped the second half would be about 176.1 million, 5.7 per cent below the 186.7 million of a year earlier. The case arithmetic and the dollar arithmetic are independent and land in the same range.

Wine and spirits is told the same way and more plainly: we expect shipment volume to decline during the second half of Fiscal 2027 as we continue to progress against mutually agreed-upon finished goods inventory reductions with key distributors. There the company says outright that the second half gives volume back.

Underneath the headline depletion number, the two largest brands are the ones falling. The release states: Depletions decreased 0.6% as declines for Modelo Especial of approximately 2% and Corona Extra of approximately 5% were partially offset by growth from Pacifico, Victoria, and the Modelo Chelada brands of approximately 19%, 15%, and 5%, respectively. The same release describes Modelo Especial as the number one brand by dollar sales in the United States and Corona Extra as a top five brand. The portfolio is holding its depletion number because the smaller brands are growing faster than the two anchors are declining.

3. The 21 per cent is the tax line

The release headline is earnings per share growth. The income statement in the 10-Q shows where it came from. Operating income fell from $874.0 million to $805.0 million, a fall of 7.9 per cent. Income before income taxes fell from $782.9 million to $729.4 million. Net income attributable to the company rose from $466.0 million to $565.8 million, 21 per cent. Only one line between those two points moved enough to do that.

The effective rate note gives the rates plainly: Effective tax rate | 15.8% | 27.6% | 20.2% | 37.9% for the six months and the three months respectively. Hold the quarter's pre-tax income of $729.4 million and apply last year's 37.9 per cent, and the provision would have been $276.4 million, leaving $436.5 million attributable to the company after noncontrolling interests, computed. That is $29.5 million below the $466.0 million reported a year earlier. On the prior year's tax rate, this was a quarter in which earnings attributable to shareholders went down.

None of that is a criticism of the accounting. The note explains the rate as lower than the 21 per cent federal statutory rate largely due to the benefit of lower effective tax rates applicable to our foreign businesses, partially offset by (i) changes to valuation allowances and (ii) certain tax legislation updates. The point is where the profit growth came from, not whether it was properly recorded.

The forward disclosure has not been reported at all. Note 9 carries a subsequent event: As a result of certain foreign tax reform enacted in September 2026, we expect to release a portion of our valuation allowance related to deferred tax assets. The MD&A quantifies it: This range includes an estimated income tax benefit of approximately $100 million to $150 million to be recognized during the three months ending November 30, 2026, as a result of certain foreign tax reform enacted in September 2026. A benefit of that size is already scheduled into the quarter ending 30 November 2026, and it has nothing to do with beer.

The clearest single signal is in the outlook table, and it is the kind of thing that almost never appears. Reported earnings per share for fiscal 2027 are guided at $11.85 to $12.55. Comparable earnings per share are guided at $11.20 to $11.90. The reported number is guided above the adjusted number, by $0.65 a share at the midpoints, computed. In fiscal 2026 the relationship ran the usual way round, reported $9.61 against comparable $11.82. The assumption underneath it is in the same table: Tax rate: reported ~12%; comparable ~20%.

4. What the incremental beer dollar earned

Beer is the engine: 93.9 per cent of net sales in the quarter, computed, at an average operating margin of 39.0 per cent. The useful question is not what the average dollar earns but what the extra dollar earned.

Beer net sales rose $128.6 million and beer segment operating income rose $12.6 million. That is 9.8 cents of segment operating income on each incremental dollar of segment net sales, computed, against 39.0 cents on the average dollar. The gap is in two lines.

Marketing rose 28.6 per cent against net sales up 5 per cent, computed, taking it from 8.1 per cent of beer net sales to 9.9 per cent. General and administrative expenses rose 31.3 per cent. The 10-Q gives the reason for the second one and it is not a volume cost: the increase is primarily due to higher compensation and benefits, led by unfavorable short-term incentive accruals as compared to Second Quarter 2026. The same sentence explains the corporate line, which rose from $45.6 million to $73.7 million, 61.6 per cent.

The release states the margin consequence directly: Operating margin decreased 160 bps to 39.0% as lower tariff expenses and favorable fixed cost absorption were more than offset by increased marketing investment and other SG&A spend. Consolidated selling, general and administrative expenses went from 17.6 per cent of net sales to 20.4 per cent, computed, which is where the consolidated operating income decline comes from.

5. The gross margin barely moved, and the reason is in the derivative note

Consolidated gross profit rose $83.0 million in the quarter and gross margin went from 52.8 to 52.9 per cent, computed. A tenth of a point, in a quarter where the release says tariff expense fell and fixed cost absorption improved. The explanation is in two notes that are not usually read together.

The first is the hedging note. Cash flow hedge gains sit in accumulated other comprehensive income and release into the income statement when the hedged item hits it. The amount released into cost of product sold was $38.4 million in the quarter against $17.8 million a year earlier, and $72.6 million in the six months against $23.0 million. Those are gains struck in earlier periods arriving now. The second is the comparable adjustments table, where the mark to market on undesignated commodity derivatives runs through cost of product sold: a $52.7 million net gain in the six months against a $4.7 million loss a year earlier.

Neither item is improper nor a surprise to anyone who hedges. A company that buys glass, aluminium and barley in one currency and sells in another has to hedge, and the gains are economically real. They are also dated: We expect $128.7 million of net gains, net of income tax effect, to be reclassified from AOCI to our results of operations within the next 12 months. That is a known tailwind sitting in equity with a date on it. Designated foreign currency contract notionals rose from $2,080.9 million to $2,651.5 million, 27.4 per cent higher, computed.

The tariff movement is genuine and the company flags it: In April 2026, the U.S. government removed beer made from malt, which includes our beer products, from the scope of the Section 232 aluminum and aluminum derivative tariffs that had been in place at various rates since February 2025. The beer segment discussion attributes $24.1 million of lower cost of product sold in the quarter to lower tariffs, and $8.2 million in the six months. That is a cost that came out, which cuts the other way from most of this file.

6. What the capital was returned at

The release leads with capital returned, and the amounts are large and real. In the first half the company paid $353.8 million of dividends and bought $454.7 million of its own shares, $808.5 million together, against free cash flow of $1,124.5 million computed as operating cash flow of $1,478.6 million less capital expenditure of $354.1 million. That is 71.9 per cent of free cash flow, computed.

The equity note gives the share counts, and the share counts give the prices. For the six months ended August 31, 2026, we repurchased 3,169,666 shares of Class A Stock pursuant to the 2025 Authorization through open market transactions at an aggregate cost of $454.7 million. That is $143.45 a share, computed. Then the subsequent event: Subsequent to August 31, 2026, we repurchased 607,371 shares of Class A Stock pursuant to the 2025 Authorization at an average cost of $123.48 per share. Across the whole of the 2025 Authorization to 30 September 2026 the company has spent $1,453.8 million on 9,429,144 shares, an average of $154.18, computed.

The three averages are on the same basis and they fall in the same direction: $154.18 across the programme, $143.45 in the first half, $123.48 after the quarter end. $2,546.2 million of the $4,000.0 million authorisation remained available at 30 September 2026. Nothing about this is irregular. It is what a buyback does when a share price falls during the programme, and it is why the discipline question is a board question rather than a treasury one.

One more number sits beside it. The earnings per share note excludes 2.785 million stock-based awards from the diluted calculation as anti-dilutive, at a weighted average exercise price of $206.87. Options struck there and shares repurchased at $123.48 are two readings of the same price history from two notes of the same filing.

Capital expenditure is the other half of the allocation picture and it rises from here. The outlook puts fiscal 2027 capital expenditure at about $800.0 million. $354.1 million was spent in the first half, which leaves about $445.9 million for the second, 25.9 per cent more than the first half, computed. The Veracruz brewery is the reason, and the 10-Q now expects commercial production there to commence at the beginning of Fiscal 2028.

7. A $600 million note retired with two day paper

On 18 September 2026 the company did two things. It signed a term loan facility and it redeemed a bond. The 10-Q records the second in one sentence: On September 18, 2026, we redeemed the 4.35% May 2022 Senior Notes prior to maturity using commercial paper borrowings at a redemption price equal to 100% of the outstanding principal amount plus accrued and unpaid interest. The fiscal 2026 Form 10-K identifies those notes: $600.0 million of principal, issued May 2022, scheduled to mature in May 2027.

So an obligation with a known date eight months away was replaced with commercial paper. The commercial paper note gives its terms: $116.5 million outstanding at 31 August 2026, a weighted average annual rate of 3.9 per cent, and a Weighted average remaining term | 2 days | 6 days at 31 August 2026 and 28 February 2026 respectively. Two days.

The size of the shift sits in a footnote to the liquidity table rather than in the borrowings note, which is why it is easy to miss. Commercial paper outstanding was $116.5 million and $607.0 million as of August 31, 2026, and September 30, 2026, respectively, and remaining revolving credit facility capacity fell from $2,122.6 million to $1,632.1 million over the same month. Both movements are $490.5 million, computed, which is the arithmetic check that they are one event: commercial paper is backed by the revolver, so every dollar issued reduces the headroom behind it.

The trade is cheaper and backstopped. Commercial paper at 3.9 per cent costs less than a 4.35 per cent coupon, the company holds a $2,250.0 million revolving facility to April 2030, and it added the $300.0 million delayed draw facility the same day. It is also, on the company's own description, a market that can close: We do not have purchase commitments from buyers for our commercial paper and, therefore, our ability to issue commercial paper is subject to market demand. The next sentence sets out the plan if it does, which is to draw the revolver.

Three further details belong with it. Cash and cash equivalents at 31 August 2026 were $98.5 million against current maturities of long-term debt of $1,103.0 million, a ratio of 11.2 times, computed, which tells you this is a company that funds maturities from cash flow and the money markets rather than from a cash pile. The covenants are stated: the minimum interest coverage ratio was 2.5x and the maximum net leverage ratio was 4.0x, and the chief financial officer's quoted comment in the release puts comparable net leverage at about 3.0 times. And the undrawn term loan is not free: the 8-K discloses that Unused commitments under the Credit Agreement will incur a ticking fee of 0.075% per annum, beginning thirty days after 18 September 2026, which on $300.0 million is about $225,000 a year while it stays undrawn, computed.

The fair value disclosure carries the largest number in this file. As of August 31, 2026, the carrying amount of long-term debt, including the current portion, was $10,199.2 million, compared with an estimated fair value of $9,444.9 million. That is $754.3 million below carrying, or 92.6 per cent of carrying, computed on carrying against carrying and fair value against fair value. Six months earlier the two figures were $10,296.5 million and $9,858.2 million, a gap of $438.3 million, so the gap widened by $316.0 million in six months. It is a disclosure rather than a loss, because the company expects to repay at par, and it is still the clearest statement in the filing of what the balance sheet would cost to replace.

The 18 September 8-K also carries a related-party paragraph that no coverage has quoted, and the structure is far more common at the small end of the market than at this one. Certain of the Credit Agreement Lenders or their affiliates and affiliates of the Administrative Agent are lenders under certain credit facilities to Sands family investment vehicles that, because of their relationship with members of the Sands family, are in some cases affiliates of the Company. And then: Such credit facilities are secured by pledges of shares of class A common stock of the Company and other credit support from certain members of the Sands family. The same banks lend to the issuer and to vehicles associated with its founding family, and the second set of loans is secured on the issuer's own stock. The disclosure is doing exactly what it should.

8. Two transactions, and where the risk sits in each

The quarter contains one purchase and one exit, and both are structured in ways worth reading.

The purchase was announced in Exhibit 99.2 to the 6 October 8-K and described again in the results release filed as Exhibit 99.1 to the same report: The transaction included a $75 million payment at close for 100% ownership of the business, as well as additional contingent consideration of up to $278 million payable over five years based on the future performance of the SpikedAde business. The headline price is $75.0 million. The maximum consideration is $353.0 million, computed, of which 78.8 per cent is contingent. The contingent portion is 3.7 times the amount paid at close.

The exit is in the fair value note. In the quarter, in connection with management's plan to divest the Nelson's Green Brier business, assets held for sale with a $54.8 million carrying value were adjusted to their estimated fair value of $5.0 million, less costs to sell, resulting in a $49.8 million net loss. That is a 90.9 per cent write-down, computed, and the fair value was set by reference to expected proceeds. It is also, on its own, larger than the fall in consolidated operating income for the quarter: $49.8 million of impairment against a $69.0 million decline in operating income.

Put beside each other, the two transactions describe the same policy from both ends. On the way in, most of the price is conditional on the business performing, so the seller carries that risk. On the way out, the asset is marked to what a buyer will pay, and the difference goes through the income statement in the quarter the plan is formed, not the quarter the cash arrives.

9. What runs the other way, and what the filings do not say

A file that only pointed one way would be a poor reading of a quarter in which net sales grew 6 per cent, gross margin held, a loss-making segment turned positive and a real cost came out of the system. Six things run the other way or are not knowable.

Three things to take back to a smaller company

Sources

Questions this file answers