We unpack Boston Beer’s brutal third quarter sales which have investors concerned

While the concept of craft beer continues to grow in the hearts and minds of consumers across the country, and as more and more local breweries pop up and grow to support this demand, the old craft beer guard is running into issues as they bump their heads against the top of the craft beer tent. The most overt example of this is the Boston Beer Co. Craft brewer by definition (at least the BA’s) but a large brewing corporation in operations and places in the market, it is both not rich enough to sneak under the Big Beer velvet rope, nor is it hip enough to get an invite to the craft beer kegger. This awkward position in the market is challenging, and its path forward to further growth isn’t totally clear.

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Quick overview of the third quarter results

Third quarter 2016 net revenue of $253.4 million is a decrease of 14 percent from the third quarter of 2015, mainly due to a decline in shipments of 12 percent and decreased revenue per barrel due to product mix.

Net income for the third quarter was $31.5 million, a decrease of $0.37 per diluted share from the third quarter of 2015. This decrease was primarily due to decreases in net revenue and a decrease in gross margin, partially offset by decreased advertising, promotional and selling expenses.

Net revenue for the 39-week period ended Sept. 24, 2016, was $687.1 million, a decrease of $57.7 million, or 8 percent, from the comparable 39-week period in 2015.

Depletions decreased 8 percent and 6 percent from the comparable 13 and 39 week periods in 2015.

Execs offer explanations

“Our total company depletion trends declined in the third quarter at a slightly faster rate as we lapped new beer launches from last year, and we saw a further slowdown in growth across the craft brewing industry,” said Jim Koch, chairman and founder of the company. “I am energized by our team’s plans to return Samuel Adams to growth, that include investments in new packaging, new beers, a fifth seasonal and enhanced drinker communication. We continue to believe that we are well positioned to meet the challenges of this competitive environment, because of the quality of our employees, our beers, our innovation capability and our sales execution strength.”

“Our third quarter depletions volume continued to be below our expectations, primarily due to decreases in our Samuel Adams, Angry Orchard, Coney Island and Traveler brands that were only partially offset by increases in our Twisted Tea and Truly Spiked & Sparkling brands,” said Martin Roper, the company’s president and CEO. “The comparative decline in the third quarter of 2016 for shipments and depletions was significantly impacted by the third quarter 2015 national launch of Coney Island Hard Root Beer and the loss of share due to new entrants in hard soda since the launch.”

“We remain prepared to forsake short term earnings, as we invest to return to long-term profitable growth, commensurate with the opportunities and the increased competition that we see,” said Martin Roper, the company’s president and CEO. “We have provided our preliminary view of 2017 growth rates but these rates are difficult to predict and subject to reassessment, as current industry trends suggest slowing of category growth rates and the impact of increased competition, new introductions and retailer programming are all unclear. Long term, we remain optimistic for future craft and cider category growth.”

2016 Outlook

• Depletions and shipments percentage change of between minus 6% and minus 2%.
• Price increases per barrel of between 1% and 2%.
• Gross margin of between 50% and 52%.
• Investments in advertising, promotional and selling expenses are forecasted between a decrease of $10 millionand flat, a decrease in the range from the previously communicated estimate of between a decrease of $5 millionand an increase of $5 million. This estimate does not include any increases or decreases in freight costs for the shipment of products to the Company’s distributors.
• Effective tax rate of approximately 36%.

2017 Outlook

• Depletions and shipments percentage change of between minus low single digits and plus low single digits.
• National price increases of between 1% and 2%.
• Gross margin of between 51% and 53%. Increasing during the year due to progress on the cost initiatives.
• Increased investment in advertising, promotional and selling expenses of between $10 million and $20 million. This does not include any changes in freight costs for the shipment of products to the company’s distributors.
• Estimated capital spending of between $40 million and $60 million, which could be significantly higher, if deemed necessary to meet future growth.