Boston Beer has big third quarter, depletions growth of 21 percent

The third quarter was good to Boston Beer Co., the holding company for Samuel Adams, which reported third quarter 2014 net revenue of $269.7 million, an increase of $53.3 million or 25 percent over the same period last year, mainly due to core shipment growth of 23 percent.

Net income for the third quarter was $37.9 million, or $2.79 per diluted share, an increase of $12.2 million or $0.90 per diluted share from the third quarter of 2013. This increase was primarily due to shipment increases and lower than expected operating costs per barrel during the third quarter due to lower employee benefit costs and the timing of certain advertising promotional and selling expenses.

Depletions grew 21 percent and 25 percent from the comparable 13 and 39 week periods in the prior year.

“Our depletions growth this quarter was strong and a result of a number of factors, including effective sales execution, support from our distributors and retailers, not to mention the quality of our beers, innovation and strong brands,” said Jim Koch, Chairman and Founder. “During the quarter, we had a smooth transition from Samuel Adams Summer Ale to our fall seasonal, Samuel Adams OctoberFest. Our fall seasonal program also included the limited release of seasonal favorites including Samuel Adams Harvest Pumpkin and a small batch double pumpkin ale, Samuel Adams Fat Jack.”

Martin Roper, the company’s president and CEO, believes depletions growth remained strong and benefited from the growth of its Samuel Adams, Twisted Tea, and Angry Orchard brands.

“We believe that the strength of our main brands reflects strong sales execution and our increased investments in media, local marketing and point of sale, and the efforts of our increased sales force,” he said. “We do not expect that the depletions growth rates we have experienced so far this year will be maintained for the remainder of the year, as we face tougher comparables and the benefit in the first half from new product launches will not be replicated during the fourth quarter of 2014. Accordingly, we have not increased our estimated full year 2014 depletion growth rate.”

“We expect our capital expansion pace to slow in 2015, as we absorb and optimize our 2013 and 2014 investments,” Roper continued. “Our sales focus in 2015 will be on second year growth of some of our successful 2014 launches, rather than continue our recent high pace of new brand launches. It is too early to accurately predict 2015 growth rates. We expect to maintain a high level of brand investment as we pursue sustainable growth and innovation, and we continue to be prepared to forsake the earnings that may be lost as a result of these investments in the short term, as we pursue long term profitable growth.”

The Company believes distributor inventory levels at September 27, 2014 were at appropriate levels. Inventory at distributors participating in the Freshest Beer Program at September 27, 2014 increased slightly in terms of days of inventory on hand when compared to September 28, 2013. The company has over 65 percent of its volume on the Freshest Beer Program and it believes participation in the Program could reach 70 percent of its volume by the end of 2014.

Some other numbers from the earnings release:

• Third quarter gross margin is 53 percent and year-to-date gross margin is 52 percent; the company maintains its full-year gross margin target of between 51 percent and 53 percent.
• Advertising, promotional and selling expense increased by $8.9 million or 16 percent in the quarter, primarily due to increased investments behind the company’s brands.
• Full-year 2014 estimated depletion growth remain unchanged at between 20 percent and 24 percent.
• Full-year 2014 capital spending is now estimated to be between $150 million and $160 million, a decrease of the range from the previously communicated estimate of $160 million to $185 million.
• Full-year 2015 capital spending is now estimated to be between $80 million and $100 million.

2015 Outlook

Boston Beer is completing its 2015 planning process and will provide further detailed guidance when the company presents its full-year 2014 results. The company is currently using the following preliminary assumptions and targets for 2015:

• Depletions and shipments percentage growth of between 10 percent and 15 percent.
• National price increases of between 1 percent and 2 percent.
• Full-year 2015 gross margins of between 51 percent and 53 percent.
• Increased investment in advertising, promotional and selling expenses of between $25 million and $35 million for the full year 2015. This does not include any increases in freight costs for the shipment of products to the company’s distributors.
• Increased expenditures of between $6 million to $12 million for continued investment in Alchemy & Science brands, which are included in the full-year estimated increases in advertising, promotional and selling expenses. These estimates could change significantly and 2015 volume from these brands is unlikely to cover these and other expenditures related to these projects that could be incurred.
• Full-year effective tax rate of approximately 38% based upon current tax laws and underlying regulations.
• Estimated full-year 2015 capital spending of between $80 million and $100 million, which could be significantly higher, dependent on capital required to meet future growth. These estimates include capital investments for existing Alchemy & Science projects of between $5 million and $7 million.