Sam Adams 2016 results: Solid fourth quarter sales, but somber analysis

Mega craft brewer Boston Beer Co. has been struggling to find its way forward in this new craft beer boom but did release some solid sales results to close out 2016 that beat expectations.

Is it a mirage though? The executive team emphasized caution going forward, and the stock dropped quickly after the call, indicating investors weren’t very excited by what they heard.

Look no further than the early news of 2017 depletions and Jim Koch’s commentary on it, which continues to show uncertainty in how to navigate the now endless shelves of competitive craft beer choices.

What’s up in 2017?

Year-to-date 2017 depletions are estimated by the company to have decreased approximately 15 percent from the comparable weeks in 2016. As a result, full-year 2017 depletion and shipment change is now estimated between minus 7 percent and plus 1 percent.

“We are disappointed with our depletion trends in 2016, which have remained weak so far in 2017,” Koch said. “These trends are affected by the general softening of the craft beer category and cider category and a more challenging retail environment with a lot of new options for our drinkers. New craft brewers continue to enter the market and existing craft brewers are expanding their distribution and tap rooms, with the result that drinkers are seeing more choices, including a wave of new beers in all markets.

“We were particularly disappointed with the performance of the first of our new spring seasonal beers, Samuel Adams Hopscape. We are introducing later this month our second spring seasonal, Samuel Adams Fresh as Helles, a bright Helles lager with orange blossom and also releasing a refreshed Samuel Adams Rebel IPA, featuring a new packaging design and a new recipe with experimental hops that create a more tropical and piney IPA.

“We are also executing the national rollout of Rebel Juiced IPA in bottles and cans in the first quarter of 2017 to complement the national draft release in the fourth quarter of 2016. We believe that the history, authenticity and quality of the Samuel Adams brand, our unique beers and our ability and willingness to continue to invest behind our brand position us well for future growth, and we are committed to improving our current trends.”

Sam Adams fourth quarter revenue

Net revenue of $219.4 million for the  fourth quarter of 2016 was an increase of $4.2 million or 2 percent year over year, mainly due to an increase in shipments of 2 percent. Net income for the fourth quarter was $22.2 million, or $1.75 per diluted share, an increase of $6.1 million or $0.54 per diluted share from the fourth quarter of 2015. This increase was primarily due to the increase in net revenue and decreases in operating expenses that were only partially offset by decreased gross margin.

For the full year, earnings per diluted share were $6.79, a decrease of $0.46, or 6 percent, from the comparable 52-week fiscal period in 2015. Net revenue for the 53-week period was $906.4 million, a decrease of $53.5 million, or 6 percent, from the comparable 52-week period in 2015.

Other quick stats

• Depletions decreased 1 percent for the fourth quarter and 5 percent for the full year.
• Gross margin for the fourth quarter was 49.1 percent and for the full year 2016 was 50.7 percent, a decrease of 1.5 percentage points compared to the respective 2015 periods.
• Advertising, promotional and selling expenses in the fourth quarter decreased $5.9 million or 9 percent compared to the fourth quarter of 2015 and decreased $29.4 million or 11 percent for the full year, primarily due to lower freight to distributors and lower media and point-of sale spending.

Priorities and outlook for 2017

The company projects full year 2017 earnings per diluted share to be between $4.20 and $6.20, reflecting the uncertain volume outlook. The company’s actual 2017 earnings per share could vary significantly from the current projection.

• Depletions and shipments percentage change of between minus 7 percent and plus 1 percent.
• National price increases of between 1 and 2 percent.
• Gross margin of between 51 and 52 percent. Increasing during the year due to progress on the cost initiatives.
• Increased investment in advertising, promotional and selling expenses of between $20 million and $30 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, most of which relates to continued investments in the company’s breweries.

“Our number one priority in 2017 is returning both Samuel Adams and Angry Orchard to growth through continued packaging, innovation, promotion and brand communication initiatives,” noted outgoing CEO Martin Roper. “Our brand and sales teams are conducting a comprehensive review of our core brand strategies and activation plans to ensure that all our investments are effective and efficient in building long-term brand equities. We will continue testing strategies and validating effectiveness, so that we can focus our investment on activities that turn around our trends.

“Our second priority is a focus on cost savings and efficiency projects to fund the investments needed to grow our brands. We have adjusted our organization to the new volume environment, including resizing short-term brewery capacity, and have implemented changes to our spending policies and behaviors. We are working to simplify and optimize our processes and to improve ingredient and material yields across all our brands. Based on these efforts, we are maintaining our previously stated goal of increasing our gross margins by about one percentage point per year over the next three years, ignoring mix or volume impacts, while preserving our quality and improving our service levels. Our third priority is long-term innovation, where our current focus is ensuring that Truly Spiked & Sparkling maintains its leadership position in its segment and reaches its full potential.”