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Boston Beer (SAM) Misses Q3 Earnings, Cuts 2016 Outlook

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Boston Beer Co. Inc. (SAM - Free Report) reported a dismal third-quarter 2016 with both the top and the bottom line lagging our estimates and falling year over year. Results were primarily 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 expectations for rest of the year, the company lowered its outlook for 2016. Additionally, it provided its initial guidance for 2017.

Consequently, the stock fell nearly 2% in the after-hours trading session on Oct 20.

Q3 Highlights

Boston Beer’s third-quarter earnings per share of $2.48 missed the Zacks Consensus Estimate of $2.54 and plunged nearly 13% year over year. The fall reflected from lower revenues and soft gross margin, partly mitigated by lower advertising, promotional and selling expenses.

Total revenue slumped 13.2% year over year to $271.2 million, while excluding excise taxes net revenue was down 14% year over year to $253.4 million. The Zacks Consensus Estimate was $291.2 million. The decline in the top line resulted from a fall in core shipments and lower revenue per barrel due to product mix. Core shipments declined 12% to 1.1 million barrels, while depletions were down 8%.

The company witnessed a more rapid fall in depletions in the third quarter owing to increased new beer launches from last year, along with a further slowdown in growth in the craft brewing industry. Depletions volume in the quarter were below expectations attributable to continued declines in the Samuel Adams, Angry Orchard, Coney Island and Traveler brands, partly offset by growth at the Twisted Tea and Truly Spiked & Sparkling brands. Further, the cider categories continued to disappoint during the quarter.

Costs & Margins

Gross profit fell 14.9% year over year to $133.6 million while gross margin shriveled 90 basis points to 52.7% in the quarter. The contraction can be attributed to adverse product mix and fixed cost absorption, partially neutralized by improved prices and cost saving initiatives at the breweries.

Advertising, promotional and selling expenses dropped 18.4% to $63.8 million due to lower freight to distributors stemming from lower volumes and freight rates, as well as lower media spending. General and administrative expenses surged 10.2% to nearly $19.5 million owing to hikes in salaries and benefits, as well as stock compensation.

Financials

As of Sep 24, 2016, Boston Beer had cash and cash equivalents of $77.3 million. Debt and capital lease obligations, excluding current portion, were at $411 million, while stockholders’ equity was $450.2 million.

During the first nine months of 2016, the company generated approximately $108.4 million of cash from operating activities, while it deployed nearly $37.1 million toward capital expenditure, primarily to be invested in breweries.

In the nine months ended Sep 24, 2016 and the period from Sep 25 through Oct 14, the company bought back nearly 807,000 Class A shares for $138.4 million. As of Oct 14, Boston Beer had roughly $196.5 million remaining under its standing share repurchase authorization of $781 million.

Growth Plan

Management remains committed to a three point growth plan. One, revival of the Samuel Adams and Angry Orchard brands via its packaging, innovation, promotion and brand communication initiatives. Two, accelerated focus on cost savings and efficiency projects, with savings directed for further brand development. Third, long-term innovation, with current focus maintaining the leadership of its Truly Spiked & Sparkling brand and ensuring it reaches full potential.

The company remains on track with its previously announced plans to innovate within the Samuel Adams brand, promote and advertise all its brands and increase distribution of its core styles within each brand. The company has already shipped a new packaging for Samuel Adams Boston Larger and remains on track to launch a new Seasonal and Rebel packaging by the end of the fourth quarter. Further, it is looking forward to a nationwide draft launch of Samuel Adams Rebel Juiced, a tropical IPA featuring citrusy hops in late October. Additionally, the company plans to add two new beers – Samuel Adams Hopscape and Samuel Adams Fresh as Helles in early 2017.

Moreover, Boston Beer remains focused on making investments to revive its hard cider category and Angry Orchard brand, while maintaining category leadership. 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 trends witnessed in the nine months of 2016, and projections for rest of the year, management lowered its earnings and depletions outlook for 2016. Earnings per share guidance was cut as well as narrowed to $6.30–$6.70, compared with $6.40–$7.00 guided earlier. Moreover, 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 -6% to -2%, compared with the previous guidance of between -4% and zero. The company continues to anticipate price increases of 1–2%, while gross margin is expected to range from 50–52%. Investment in advertising, promotional and selling expenses are now envisioned to a range between a $10 million decline and flat, compared with a range of decrease of $5 million and an increase of $5 million anticipated earlier.

Effective tax rate for 2016 is anticipated to be 36% versus 36.3% predicted earlier. The company also lowered its range of capital expenditure for the year to $55–$65 million from $60–$70 million.

Further, the company provided its initial view for 2017. The company expects depletions and shipments percentage change between negative low single-digits and positive low single-digits and price increases of 1–2%. Gross margin is expected in the range of 51–53% due to increased cost savings. Investments in advertising, promotional and selling expenses are anticipated to increase in the $10–$20 million range.  Further the company estimates effective tax rate of 36.3% and capital expenditures in the range of $40–$60 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 #4 (Sell). Some better-ranked stocks in the same industry include Constellation Brands Inc. (STZ - Free Report) , Anheuser-Busch InBev SA/NV (BUD - Free Report) and Molson Coors Brewing Company (TAP - Free Report) , each with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Constellation Brands has jumped 17.2% year to date. The stock has a long-term earnings growth rate of 17.9%.

Anheuser-Busch, with a long-term earnings growth rate of 11.1%, has surged nearly 8.7% in the past one year.

Molson Coors has gained nearly 15.6% year to date. Moreover, it has a long-term earnings growth rate of 6%.

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