The Boston Beer Company, Inc. (SAM - Free Report) reported lower-than-expected results in the fourth quarter of 2017 with the top and bottom lines missing the Zacks Consensus Estimate. Notably, the quarter marked earnings miss after four straight positive surprises, while sales lagged estimates after two consecutive beat.
Boston Beer’s fourth-quarter adjusted earnings per share of 84 cents missed the Zacks Consensus Estimate of 94 cents.
However, earnings came in at $2.57 per share, including one-time items like gains of $1.72 from the Tax Cuts and Jobs Act of 2017 and a tax benefit of 1 cent owing to the adoption of the new Accounting Standard – Employee Share-Based Payment Accounting (ASU 2016-09), effective Jan 1, 2017. The company posted earnings of $1.75 per share in the 14-week period ended Dec 31, 2016.
The year-over-year rise in the bottom line mainly stemmed from favorable tax reforms along with higher gross margin, somewhat compensated with lower shipment volumes and increased investments in brands.
On the contrary, revenues dropped nearly 6% year over year to $220.5 million. Excluding excise taxes, the top line decreased 5.9% year over year to $206.3 million and lagged the Zacks Consensus Estimate of $208 million. While, shipment volume was down 7.7%, depletions declined 10%.
In the reported quarter, depletion volumes were impacted by the loss of a week’s depletions and persistent decline in the Samuel Adams and Angry Orchard brands, partly mitigated by growth in Twisted Tea, and Truly Spiked & Sparkling brands.
However, depletions for the year-to-date period through the six-week period ended Feb 10, 2018 are estimated to have grown nearly 6% from the comparable year-ago period.
Costs & Margins
Gross profit inched up 0.3% year over year to $108 million, while gross margin expanded 330 basis points to 52.4% in the quarter. The improvement in gross margin can be attributed to better pricing, product and package mix along with cost-savings gains from the company-owned breweries. These were partly mitigated by adverse fixed cost absorption due to lower volumes as well as increased higher ingredients and packaging expenses.
Furthermore, advertising, promotional and selling expenses jumped 26.8% to $73.4 million, mainly owing to higher investments in media and digital advertising, increased local marketing, production and market research expenses. The increase was somewhat offset by lower freight to distributors on reduced volumes and rates.
General and administrative expenses grew 19.7% to $18.8 million. The upside was backed by the impact of $3.6 million from the reversal in stock compensation cost in the year-ago quarter, associated with the retirement of the company’s chief executive officer in 2018. The metric was somewhat offset with decline in consulting fees in the reported quarter.
As of Dec 30, 2017, Boston Beer had cash and cash equivalents of $65.6 million and total stockholders’ equity of $423.5 million.
In 2017, the company generated approximately $136 million of cash from operating activities.
As of Feb 16, 2018, Boston Beer bought back about 179,000 shares worth roughly $31.9 million. With this, it had nearly $169.8 million remaining under its $931-million share buyback authorization.
Management remains committed toward a three-point growth plan. Firstly, revival of the Samuel Adams and Angry Orchard brands through packaging, innovation, promotion and brand communication initiatives. It has launched new media campaigns for the Samuel Adams and Angry Orchard brands as well. Additionally, the company remains optimistic about other innovative product launches like Sam '76, Samuel Adams New England IPA and Angry Orchard Rose. It also targets to retain momentum for the Twisted Tea brand and gaining leadership for Truly Spiked & Sparkling brand in the hard sparkling water category.
Secondly, accelerated focus on cost savings and efficiency projects with savings directed for further brand development. Depending upon the current opportunities in 2018, management reiterated its gross margin expansion target, which is likely to grow on an average of roughly one percentage point every year through 2019.
Thirdly, management remains committed to long-term brand innovations and maximizing the shareholder value. Boston Beer also remains optimistic about the craft beer and cider categories, going forward.
In the past six months, this Zacks Rank #3 (Hold) company’s shares have rallied 32.3%, substantially outperforming the industry’s gain of 1.8%. We believe these initiatives to drive growth and retain the stock momentum going forward.
Management updated its outlook for 2018. Depletions and shipments are likely to range from flat to up 6% compared with the earlier guidance of growth in low-single digits. Prices are expected to grow in the 0-2% band compared with 1-2% guided earlier. Gross margin expansion is anticipated to lie between 52% and 54% owing to the progress on the cost savings. Earlier, the company projected gross margin to grow between 52-53%.
Investment in advertising, promotional and selling expenses are still envisioned to increase in the range of $15-$25 million. Management anticipates general and administrative expenses to grow within the $10-$20 million range, attributable to organizational investments as well as stock compensation expenses.
For 2018, earnings per share are envisioned between $6.30 and $7.30. The Zacks Consensus Estimate is currently pegged at $7.01 for the year.
Moreover, adjusted effective tax rate guidance is anticipated to be roughly 28%, excluding the impact of ASU 2016-09, versus 37% guided earlier. Capital spending is still envisioned in the band of $55-$65 million for 2018, which can increase per the requirements.
Looking for Solid Stocks, Check These
Some better-ranked stocks in the broader Consumer Staples sector include Post Holdings, Inc. (POST - Free Report) , Craft Brew Alliance, Inc. (BREW - Free Report) and Sysco Corporation (SYY - Free Report) .
Post Holdings has a long-term earnings growth rate of 14% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Craft Brew Alliance carries a Zacks Rank #2 (Buy). The stock has pulled off an average positive earnings surprise of 250.2% in the trailing four quarters.
Sysco, also a Zacks Rank #2 stock, has a long-term earnings growth rate of 10.1%.
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