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Boston Beer Falls as Q4 Earnings Lag Ests

Zacks Equity Research

Boston Beer Co. Inc. (SAM) came up with disappointing fourth-quarter and full-year 2013 results yesterday after the closing bell, wherein its bottom-line results for both the periods lagged the Zacks Consensus Estimate. This spread negative sentiment among investors, resulting in a fall of 4.9% in the company’s share price during the after-hour trading session.

Boston Beer’s quarterly earnings per share of $1.33 came substantially below the Zacks Consensus Estimate of $1.51. The company’s full-year 2013 earnings of $5.18 per share also fell short of the Zacks Consensus Estimate of $5.39. Negative impact from increased ingredient and processing costs, unfavorable product mix and higher operating expenses primary led to the lower-than-expected bottom-line performance.

However, on a year-over-year basis, Boston Beer’s earnings for the quarter improved 6.4% to $1.33 per share from $1.25 reported in the comparable year-ago period. The rise was mainly driven by top-line growth, which was partially offset by the negative factors mentioned earlier. For the full-year 2013, Boston Beer registered a year over year growth of 18.0%.

Quarterly Discussion

Net revenue for the quarter rose 34.2% year over year to $205.4 million and came ahead of the Zacks Consensus Estimate of $191.0 million, primarily attributable to an increase of 29% in core shipment volume.

However, depletion growth of 20% in the quarter was lower than core shipment volume growth as the distributors were replenishing inventories in the quarter. During the third quarter, certain brands had experienced production shortages that were filled in the recently concluded quarter.

The company’s gross profit increased approximately 31.2% year over year to $104.6 million. However, as a percentage of net revenue, it contracted 100 basis points (bps) to 51% primarily due to increased ingredient and processing costs as well as unfavorable product mix.

Operating income in the quarter came in at $29.1 million, up 7.9% from the year-ago quarter level of nearly $27.0 million. However, operating margin contracted 340 bps to 14.2% due to lower gross margin and higher operating expenses as a percentage of net revenue.

Full-Year 2013 Performance

The company generated net revenue of $739.1 million, up approximately 27.4% from $580.2 million in fiscal 2012. Moreover, it came ahead of the Zacks Consensus Estimate of $727.0 million.

Gross profit for the year increased 22.1% to $384.9 million but as a percentage of net revenue, it declined 220 bps to 52.1%. Operating income during the period grew 18.3% to $113.1 million but as a percentage of net revenue, it contracted 120 bps to 15.3%.

Balance Sheet

Boston Beer, which competes with Diageo plc (DEO) and Beam, Inc. (BEAM), ended the year with cash and cash equivalents of $49.5 million compared with $74.5 million as of Dec 29, 2012. Long-term debt and capital lease obligations excluding current maturities stands at $584.0 million while stockholders’ equity was $302.1 million as of Dec 28, 2013.

During the full year, Boston Beer generated cash flow of approximately $100.0 million from its operating activities while it spent $100.7 million toward purchase of property, plants and equipment. In 2014, the company intends to make capital expenditure in the range of $160.0 million to $220.0 million.

Further, Boston Beer has amended its line of credit in January by increasing the available amount to $150 million from $50 million while extending the expiry period to Mar 31, 2019.

The company revealed that it did not repurchase any shares during the fourth quarter and has $25.5 million remaining as of Feb 21 under its $325.0 million share repurchase program. During 2014, it bought back $29.6 million worth of common stock.

Fiscal 2014 Outlook

With concluding its previous fiscal, the company provided an outlook for full-year 2014. For the year, Boston Beer expects depletion and shipment to in the range of 16% to 20%. Further, to offset the rise in ingredient, packaging and freight costs as well as increased investments in brands, it anticipates to increase prices by 2%.

Gross margin is projected to range between 51% and 53%. Spending toward advertising, promotional and selling expenses are expected to be in the band of $34.0 to $42.0 million. Effective tax rate for the period is forecasted to be approximately 38%.

Considering these assumptions, Boston Beer expects its full-year 2014 earnings per share to come in the range of $6.00 to $6.40. Currently, the Zacks Consensus Estimate for the year stands at $6.42 per share.

Currently, Boston Beer has a Zacks Rank #3 (Hold). A better-ranked company within the industry is Constellation Brands Inc. (STZ), which sports a Zacks Rank #1 (Strong Buy).

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