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Boston Beer (SAM) Beats on Q3 Earnings & Sales, Revises View

Zacks Equity Research

The Boston Beer Company, Inc. SAM reported impressive third-quarter 2019 results, wherein earnings and revenues not only outpaced the Zacks Consensus Estimate but also improved year over year. With this, the company delivered the fifth straight positive earnings surprise.

Quarterly results were fueled by higher revenues, owing to solid shipment and depletions. Notably, robust shipment growth due to the company’s efforts to ensure that distributors’ inventory levels were appropriate to cater to increased customer demand aided results. Further, strong depletions were supported by continued strength in Truly Hard Seltzer and Twisted Tea brands. Driven by the positive trends, management raised the lower end of earnings, shipments and depletions view for 2019.

Q3 Highlights

Boston Beer’s third-quarter adjusted earnings of $3.58 per share surpassed the Zacks Consensus Estimate of $2.79. Further, the bottom line rose 11.5% from $3.21 earned in the year-ago period, backed by robust revenue growth. The upside was partly negated by lower gross margin coupled with higher advertising, promotional and selling costs.

The Boston Beer Company, Inc. Price, Consensus and EPS Surprise

 

The Boston Beer Company, Inc. Price, Consensus and EPS Surprise

The Boston Beer Company, Inc. price-consensus-eps-surprise-chart | The Boston Beer Company, Inc. Quote

Notably, the company concluded the Dogfish Head Brewery transaction and started consolidating Dogfish Head’s financial results. On a GAAP basis, earnings were $3.65 per share in the reported quarter.

Net revenues advanced 23.3% year over year to $378.5 million and outpaced the Zacks Consensus Estimate of $365 million. Including excise taxes, the top line rose 23.2% year over year to $402.7 million.

Robust top-line performance can primarily be attributed to a 19.1% improvement in shipments to nearly 1.6 million barrels. In fact, distributor inventory as of Sep 28, 2019, averaged roughly 3 weeks on hand. Management projects wholesaler inventory levels between 2 and 4 weeks on hand through the rest of 2019.

In the quarter under review, depletions grew 30%, marking the sixth straight quarter of double-digit growth. Depletion growth can be attributed to major innovations, quality of products and strong brands alongside solid sales execution and support from distributors. Further, increases in Truly Hard Seltzer and Twisted Tea brands as well as the inclusion of Dogfish Head brands aided growth. Depletion growth was partly offset by the fall in Samuel Adams and Angry Orchard brands.

Depletions for the year-to-date period through the 42 weeks ended Oct 19, 2019, are anticipated to have grown nearly 21% from the year-ago period. Excluding Dogfish Head Brewery, depletions grew 19%.

Costs & Margins

Gross profit improved about 19.5% year over year to $187.8 million. However, gross margin contracted 160 basis points to 49.6% due to elevated processing costs, stemming from higher production at third-party breweries and increased temporary labor requirements at company-owned breweries. These factors were partly negated by higher prices and cost savings at company-owned breweries.

Furthermore, advertising, promotional and selling expenses rose nearly 10% to $96.6 million. Higher spending on media and production, and local marketing as well as the inclusion of Dogfish Head brand-related expenses, beginning Jul 3, led to the increase.

General and administrative expenses totaled $31.4 million, up 38.3% from the year-ago quarter. This increase was mainly driven by non-recurring Dogfish Head Transaction costs, and the addition of Dogfish Head’s general and administrative expenses.

Financials

As of Sep 28, 2019, Boston Beer had cash and cash equivalents of $27.1 million, and total stockholders’ equity of nearly $719 million. Moreover, it had no amounts outstanding on its line of credit.

During the first nine months, and the period between Sep 29, 2019 and Oct 26, 2019, Boston Beer did not repurchase shares. As a result, the company had nearly $90.3 million remaining under the $931-million share buyback authorization.

Outlook

Management updated guidance for 2019. Boston Beer now estimates shipment and depletion growth of 19-22% compared with 17-22% mentioned earlier. Excluding Dogfish Head Brewery, shipment and depletion growth is expected to be 15-18%. National price increases are still estimated between 1% and 3%.

Moreover, the company has been witnessing higher costs due to the use of third-party breweries and a higher proportion of various packs in its entire product mix. These are likely to hurt gross margin, which is still anticipated to be 50-51%. Investment in advertising, promotional and selling expenses is now envisioned to increase $40-$50 million, up from $35-$45 million stated earlier. The increase mainly stemmed from higher spending on Truly brand, excluding any change in freight expenses.

For 2019, the adjusted effective tax rate is estimated to be roughly 27%. The company now envisions adjusted earnings per share of $8.70-$9.30 compared with $8.30-$9.30 mentioned earlier. The Zacks Consensus Estimate for 2019 is currently pegged at $9.13. Furthermore, it now expects capital spending of $100-$110 million compared with $120-$140 million stated earlier.

For 2020, management projects depletion and shipment growth between high teens and low twenties along with national price increases of 1-3%. Moreover, gross margin is expected to be 49-51%. Investments in advertising, promotional and selling costs are projected to rise $65-$75 million.

Further, the adjusted effective tax rate is expected to be roughly 27%. Capital spending is estimated to be $95-$115 million for 2020.

Price Performance

Year to date, the Zacks Rank #2 (Buy) stock has gained 54.2%, outperforming the industry’s 11.2% rally.

 



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