Boston Beer continues to grow through diverse new brands while Sam Adams lags in Q3 earnings report

The Boston Beer Co. continues to diversify and build out its offerings in new categories while slowly rebuilding the market and messaging for its flagship brand.

In its third quarter earnings report, the company showed net revenue of $306.9 million, an increase of $59.8 million or 24.2 percent from the third quarter of 2017, mainly due to an increase in shipments of 23.5 percent. Net income for the third quarter was $38.0 million, an increase of $4.3 million from the third quarter of 2017. This increase was primarily due to increases in net revenue and lower income taxes that were partially offset by increased advertising, promotional and selling expenses and lower gross margins.

Depletions growth

Depletions increased 18 and 13 percent from the comparable 13- and 39-week periods in 2017. Full year 2018 depletions growth is now estimated to be between 12 and 15 percent, an increase from the previously communicated estimate of between 7 and 12 percent.

This growth was the result of increases in the Truly Spiked & Sparkling, Twisted Tea and Angry Orchard brands that were only partially offset by decreases in the Samuel Adams brand. Year-to-date depletions through the 42-week period ended October 20, 2018, are estimated by the company to have increased approximately 13 percent from the comparable period in 2017.

“I’d like to note, however, that the Samuel Adams seasonal program has returned to growth this year,” stated Dave Burwick, the company’s president and CEO. “Meanwhile, Truly continues to grow beyond our expectations and is well positioned as a leader in the emerging segment of hard seltzer. Twisted Tea is growing both distribution and velocity, while generating consistent double-digit volume growth as new entrants have been introduced and competition has increased. Angry Orchard’s growth is led by Angry Orchard Rosé, which was introduced in early 2018. We believe that both Truly and Angry Orchard Rosé are attracting new drinkers to their categories from wine and spirits.”

Reviving Sam Adams

During the quarter, the company introduced a new Samuel Adams advertising campaign and continued to work hard on its Samuel Adams brand messaging. Advertising, promotional and selling expense increased by $24.1 million, or 37.9 percent, in the third quarter over the comparable period in 2017 and increased $56.6 million, or 30.5 percent, from the comparable 39-week period in 2017.

“We believe that the acceleration in our depletions growth is attributable to our key innovations, quality and strong brands, as well as sales execution and support from our distributors,” stated Jim Koch, chairman and founder. “We plan to invest in this campaign in the coming months, with the goal of improving trends and returning Samuel Adams back to growth. We remain positive about the future of craft beer and are happy that our diversified brand portfolio continues to fuel double-digit growth. We are confident in our ability to innovate and build strong brands, and we are planning to launch new brands in 2019 that complement our current portfolio and help support our mission of long-term profitable growth.”

2019 plans

The plans for 2019 include investments in the new Samuel Adams advertising campaign and the continuation of successful 2018 innovations like Angry Orchard Rosé, Truly Berry Variety Pack, Truly Wild Berry, Sam’76 and Samuel Adams New England IPA. Overall, those five new innovations in 2018 are within the top product introductions in their combined categories.

“We’ve adjusted our expectations for 2018 full-year depletions growth and our earnings guidance to reflect our trends for the first nine months and our current view of the remainder of the year,” Burwick noted. “We’ve provided our preliminary view of 2019 growth rates based on our plans, but these rates are difficult to predict and subject to reassessment. We’re in a very competitive business, and we remain optimistic for continued long-term growth of our current brand portfolio and our innovations.”

The company operated at record high capacity during peak weeks and increased its usage of third-party breweries during the quarter in response to the accelerated depletions growth, especially in slim can packages and cans in general.

“The growth has been challenging operationally, which has resulted in higher supply chain costs,” Burwick said. “Given the growth challenges and industry-wide headwinds of higher packaging costs and transportation costs, we’ve reduced our expectations for 2018 gross margins. While we’re achieving the expected cost savings, the corresponding margin benefits are more than offset by the incremental costs that we’re incurring to meet the significant growth in our key innovations. We expect to recoup most of the 2018 margin set back as we adjust our supply chain over the next couple of years.”

Shipment volume was approximately 1.3 million bbls, a 23.5 percent increase from the comparable 13-week period in 2017. Shipments for the quarter increased at a higher rate than depletions and resulted in higher distributor inventory as of September 29, 2018, when compared to September 30, 2017.

2018 outlook

Underlying the company’s current 2018 projection are the following full-year estimates and targets:

• Depletions and shipments growth of between 12 and 15 percent.
• Price increases per barrel of between 1 and 2 percent.
• Gross margin of between 50 and 52 percent.
• Increased investments in advertising, promotional and selling expenses of between $15 million and $25 million. This does not include any changes in freight costs for the shipment of products to the company’s distributors.
• Increased general and administrative expenses of between $10 million and $20 million due to organizational investments and stock compensation costs.
• Non-GAAP effective tax rate of approximately 24 percent, which includes the favorable one-time impact of $0.38 per diluted share due to tax accounting method changes reported in the third quarter, but excludes the impact of ASU 2016-09.
• Estimated capital spending of between $65 million and $75 million, most of which relates to continued investments in the company’s breweries and taprooms.

2019 outlook

The company is currently using the following preliminary assumptions and targets for its 2019 fiscal year:

• Depletions and shipments percentage increase of high single digits to low double digits.
• National price increases of between 0 and 3 percent.
• Gross margin of between 51 and 53 percent. Increasing during the year due to progress on the capacity and cost initiatives.
• Increased investment in advertising, promotional and selling expenses of between $25 million and $35 million. This does not include any changes in freight costs for the shipment of products to the company’s distributors.
• Non-GAAP effective tax rate of approximately 27 percent, excluding the impact of ASU 2016-09.
• Estimated capital spending of between $100 million and $120 million, which could be significantly higher, if deemed necessary to meet future growth.