Boston Beer releases disappointing 2015 earnings report -- cause for concern?

The Boston Beer Co., the largest and mightiest independent craft brewing company (by the BA definition), released a disappointing year-end and Q4 2015 earnings report on top of an already declining stock. We will look at the numbers, the 2016 outlook, what the executives had to say about everything and how some analysts are evaluating the company right now.

The results

Boston Beer’s fourth quarter 2015 net revenue of $215.1 million, a decrease of $2.7 million or 1percent from the same period last year, mainly due to a decline in core shipments of 3 percent, partially offset by price increases. Net income for the fourth quarter was $16.1 million, or $1.21 per diluted share, a decrease of $3 million or $0.19 per diluted share from the fourth quarter of 2014. This decrease was primarily due to the decrease in net revenue and increases in advertising, promotional and selling expenses that were only partially offset by increased gross margin.

Net revenue for the 52-week period ended Dec. 26, 2015, was $959.9 million, an increase of $56.9 million, or 6 percent, from the comparable 52-week period in 2014.

Depletions decreased 3 percent from the comparable 13-week period in 2014 and increased 4 percent over the comparable 52-week period in 2014.
Gross margin for the fourth quarter was 50.6 percent and the full year 2015 was 52.3 percent.
Advertising, promotional and selling expenses in the quarter increased $5.3 million or 9 percent compared to the fourth quarter of 2014 and increased $22.9 million or 9 percent for the full year 2015, primarily due to planned increased investments behind the company’s brands.
Full year 2015 capital spending totaled $74.2 million, most of which relates to continued investments in the company’s breweries.
Year-to-date depletions through the six weeks ended Feb. 6, 2016 are estimated by the company to have decreased approximately 3 percent from the comparable period in 2015.
The company’s stock is down 16 percent since Dec. 5.

2016 outlook

The company currently projects full year 2016 earnings per diluted share to be between $7.60 and $8. The company’s actual 2016 earnings per share could vary significantly from the current projection. The 2016 fiscal year includes 53 weeks compared to the 2015 fiscal year which included only 52 weeks. Underlying the company’s current 2016 projection are the following 53-week full-year estimates and targets:

Depletions and shipments percentage growth of mid-single digits.
National price increases of between 1 percent and 2 percent.
Gross margin of between 52 percent and 54 percent.
Increased investment in advertising, promotional and selling expenses of between $10 million and $20 million. This does not include any increases in freight costs for the shipment of products to the Company’s distributors.
Effective tax rate of approximately 37 percent.
Estimated capital spending of between $60 million and $80 million, which could be significantly higher, depending on capital required to meet future growth.

The execs

Jim Koch, Chairman and Founder: “Our depletion trends softened during the year, even as the better beer and craft categories appear healthy. We believe we have lost share, as new craft brewers enter the market and more existing craft brewers are expanding their regional distribution, with the result that drinkers are seeing more choices, including a wave of new beers in all markets. We believe that craft beer will continue to grow and that we are well positioned to share in that growth and meet the challenge of the current environment, through the quality of our beers, our innovation capability and our sales execution strength, coupled with our strong financial position that enables us to invest in growing our brands.

Martin Roper, President and CEO: “In the fourth quarter, our depletions declined due to decreases in our Samuel Adams and Angry Orchard brands that were only partially offset by increases in our Coney Island, Twisted Tea and Traveler brands. This decline is largely due to increased competition in the craft beer category and general weakness in the cider category. We are working hard to improve the Samuel Adams brand trends and feel good about our new media advertising message ‘Know more. Love more,’ although it is too early to know if this messaging will stabilize our trends. During the fourth quarter, we saw the cider category start to decline, even as new cideries continued to enter.

“Our primary focus in 2016 will be on innovating within the Samuel Adams family, integrating persuasive drinker programming across point of sale, promotions and media for all of our brands, and prioritizing the core styles of Angry Orchard, Twisted Tea, Traveler and Coney Island Hard Root Beer for increased distribution and promotion. We are increasing investments in our new beer and cider development capabilities, so we can maintain the pace of innovation and also be positioned to react quickly to any opportunities that emerge. We expect to maintain a high level of brand investment in this competitive environment, as we pursue sustainable growth. At the same time, we are taking steps to ensure that our investment dollars are well spent. To that end, we plan to evaluate the effectiveness of all of our investments and endeavor to improve our internal processes and cost structures. We continue to evaluate all our spending, so as to allocate it to the activities which are most likely to support growth.”

The analysis

So, the ongoing storylines leading to the declining numbers and general concern include the decline in the cider category and the softening demand for the company’s core beers and seasonals. The main reasons for hope for the company include the push of Rebel IPA, Rebel Grapefruit IPA and the new Nitro beer. But there is plenty of reason to believe that this decline is just a sign of things to come.

For the Wall Street perspective, we turn to Alex Pitti at Seeking Alpha. Here are some highlights from his subtly titled “There’s No Hope” column:

The earnings report on Thursday afternoon was very bad. The firm beat EPS by 8 cents in Q4 by reporting $1.21. Revenue missed expectations by $9.05 million, coming in at $215.13 million. The problem was guidance and negative commentary. The full-year earnings guidance was between $7.60 and $8.00. This means the mid-point of the range is 28 cents below what Wall Street expected. Not only is this a disappointment, but … this guidance is probably too optimistic.

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Craft drinkers are more likely to try new products than Budweiser drinkers. If the competition grows at a 10% clip per year and drinkers have no loyalty to any brands, this is a recipe for market share losses.

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The loss in market share of Sam Adams can be improved by changes in messaging to try to better compete with other brands. Marketing cannot convince consumers to drink hard cider if they don’t like it anymore.

The reality is these brands are not sustainable products. They are fads which gain popularity very quickly and lose them equally as quickly.

If interested in such things, and if you’ve read this far, I assume you are, definitely head to Seeking Alpha for the rest of the column.