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Boston Beer (SAM) Beats on Q2 Earnings, Curtails 2016 View

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Boston Beer Co. Inc. (SAM - Free Report) posted better-than-expected earnings for second-quarter 2016, while sales were in line with estimates. However, both top and bottom lines fell year over year, largely affected by lower shipments and depletion trends, along with higher costs and intense competition from other craft brewers. Based on the year-to-date trends and weak results, the company lowered its outlook for 2016.

Q2 Highlights

Boston Beer’s second-quarter earnings per share of $2.06 surpassed the Zacks Consensus Estimate of $1.97. However, earnings fell 5.5% year over year, mainly on account of a revenue decline, elevated general and administrative costs, and soft gross margin partly offset by lower advertising, promotional and selling expenses.

The Boston Beer Company Inc. (SAM - Free Report) Street Actual & Estimate EPS - Last 5 Quarters | FindTheCompany

Net revenue was down 3% year over year to $244.8 million and was almost in line with the Zacks Consensus Estimate of $244 million. The decline in the top line resulted from a 4% drop in core shipments to 1.1 million barrels, along with a 5% fall in depletions, which was consistent with the first-quarter trend.

While the overall beer and craft categories remain strong, the soft-depletion trend at Boston Beer is due to the continued weakness at the Samuel Adams brand, which is losing share to the rising competition in craft beer and the shift of consumers’ interest toward trying new styles. Additionally, declines at the Angry Orchard and Traveler brands contributed to the fall in depletions, partially offset by growth at the Twisted Tea, Coney Island and Truly Spiked & Sparkling brands.

Though the company has seen some improvement in the depletion trends since mid-June, it is unsure if these trends will sustain. For the rest of 2016, it expects to witness more favorable hard cider comparisons and positive impact from Truly Spiked & Sparkling. However, the fate of the broader hard cider and craft beer categories as well as the company’s new brand launches remains unpredictable.

Costs & Margins

Gross profit fell 3.8% year over year to $126.9 million while gross margin shriveled 220 basis points to 51.8% in the quarter. The contraction can be attributed to unfavorable product mix coupled with higher brewery processing expenses per barrel, partly offset by improved prices.

Advertising, promotional and selling expenses dipped 11.3% to $63.3 million due to lower freight to distributors stemming from lower volumes and freight rates as well as lower media spending, partially offset by increased points of sale.

General and administrative expenses surged 21.1% to nearly $21.8 million owing to hikes in salaries, benefits, stock compensation and facilities expenses.

Financials

As of Jun 25, 2016, Boston Beer had cash and cash equivalents of $27.6 million. Debt and capital lease obligations, excluding current portion, were at $411 million, while stockholders’ equity was $412.2 million.

During first-half 2016, the company generated approximately $48.3 million of cash from operating activities, while it deployed nearly $26 million toward capital expenditure, primarily to be invested in breweries.

In the first half of 2016 and the period from Jun 26, 2016 through Jul 16, the company bought back nearly 743,000 shares for $127.7 million. As of Jul 16, Boston Beer had roughly $12.2 million remaining under its standing share repurchase authorization of $586 million.

Growth Plan

Management intends to focus on aggressively aligning its cost structure with volumes, to achieve efficiencies across the organization and generate cost savings. The company plans to utilize these cost savings in making strategic investments, apart from developing its brands.

The company maintains its commitment to innovate within the Samuel Adams brand, promote and advertise all its brands, and increase distribution of its core styles within each brand. It plans to introduce new packaging and advertising in the second half of 2016 for the Samuel Adams brand, in order to support its promotional plans. The company also remains keen on sales execution and a completely reviewing brand messaging and packaging across all its brands, along with persistent innovation for existing brands and utilizing any growth opportunity that might arise.

Also, Boston Beer plans to step-up investments to revive its hard cider category and Angry Orchard brand, while maintaining category leadership. The company is on track with the roll out of the Truly Spiked & Sparkling brand, which has been well-received by distributors, retailers and drinkers. In the third quarter, the company expects to support this roll out with media and increase investments above planned levels in case of a positive response.

Though management is prepared for not so impressive bottom-line results in the short-term, it remains on track to boost long-term profitability.

Guidance

Taking into consideration the first-half trends, management lowered its earnings and depletions outlook for 2016. Earnings per share are now projected in the range of $6.40–$7.00, compared with $6.50–$7.30 guided earlier. Also, the company stated that 2016 will include 53 weeks as against 52 weeks last year.

Other assumptions for earnings include depletions and shipments changes of between -4% and zero, compared with -4%–2% expected earlier. The company continues to expect price increases of 1%–2%, while gross margin is now expected to range from 50–52%, down from 51–53% projected earlier. Investment in advertising, promotional and selling expenses are now envisioned to a range of decrease of $5 million and an increase of $5 million, compared with zero and $10 million anticipated earlier.

Effective tax rate for 2016 is anticipated to be 36.3% versus 37% predicted earlier. The company also narrowed its range of capital expenditure for the year to $60–$70 million from $50–$70 million.

BOSTON BEER INC Price, Consensus and EPS Surprise

BOSTON BEER INC Price, Consensus and EPS Surprise | BOSTON BEER INC Quote

Zacks Rank

Boston Beer currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Constellation Brands Inc. STZ and Molson Coors Brewing Company TAP, each with a Zacks Rank #2 (Buy). Another well-ranked stock in the related industry is Primo Water Corp. PRMW, also with a Zacks Rank #2.

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