Why Is Boston Beer (SAM) Down 19.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Boston Beer (SAM). Shares have lost about 19.5% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Boston Beer due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Boston Beer Q4 Earnings Miss Estimates

Boston Beer reported fourth-quarter 2019 results, wherein earnings missed the Zacks Consensus Estimate but revenues beat the same. Revenue gains from robust shipments and strong depletions were more than offset by lower gross margin, and higher advertising, promotional and selling costs.

Boston Beer’s fourth-quarter adjusted earnings of $1.24 per share missed the Zacks Consensus Estimate of $1.42. Further, the bottom line declined 33.3% from $1.86 earned in the year-ago period mainly due to lower gross margin coupled with higher advertising, promotional and selling costs. This was partly offset by higher revenues. On a GAAP basis, earnings were $1.12 per share in the reported quarter.

Net revenues advanced 33.8% year over year to $301.3 million and outpaced the Zacks Consensus Estimate of $277.1 million. Excluding excise taxes, the top line rose 33.9% year over year to $320.2 million.

Robust top-line performance can primarily be attributed to a 31.7% improvement in shipments to 1.3 million barrels. Excluding the addition of the Dogfish Head brands, beginning Jul 3, 2019, shipments increased 25.6%. Depletions grew 25%, including a 19% rise from Boston Beer legacy brands and 6% from the addition of Dogfish Head brands. Notably, shipments reflected a higher growth rate than depletions in the quarter, which resulted in higher distributor inventory levels as of Dec 28, 2019.

Depletion growth can be attributed to major innovations, quality of products and strong brands alongside solid sales execution and support from distributors. Further, increases in Truly Hard Seltzer and Twisted Tea brands as well as the inclusion of Dogfish Head brands aided growth. Depletion growth was partly offset by the fall in Samuel Adams and Angry Orchard brands.

Notably, the Truly brand is generating triple-digit volume growth and expects to continue expanding brand distribution across all channels. Meanwhile, the Twisted Tea brand generated consistent double-digit volume growth in the fourth quarter despite increased competition from new entrants.

Depletions for the year-to-date period through the six weeks ended Feb 8, 2020, have grown nearly 34% from that witnessed in the year-ago period. Excluding Dogfish Head Brewery, depletions grew 28%.

Costs & Margins

Gross profit improved 22.2% year over year to $142.8 million. However, gross margin contracted 450 basis points to 47.4% due to elevated processing costs, stemming from higher production at third-party breweries and increased temporary labor requirements at company-owned breweries. The factors were partly negated by higher prices and cost savings at company-owned breweries.

Furthermore, advertising, promotional and selling expenses rose 47.7% to $93.2 million. The increase was driven by higher investments in media, production and local marketing; expenses related to the inclusion of Dogfish Head brand, beginning Jul 3; higher salaries and benefits costs; and increased freight to distributors due to higher volumes.

General and administrative expenses totaled $31.2 million, up 25.3% from the year-ago quarter. The increase was mainly driven by non-recurring Dogfish Head Transaction costs, and the addition of Dogfish Head’s general and administrative expenses. Additionally, increases in salaries and benefits costs contributed to the rise.

Financials

As of Dec 28, 2019, Boston Beer had cash and cash equivalents of $36.7 million, and total stockholders’ equity of $735.6 million. Moreover, it had no amounts outstanding on its line of credit.

During 2019, and the period between Dec 29, 2019, and Feb 14, 2020, Boston Beer did not repurchase shares. As a result, the company had $90.3 million remaining under the $931-million share buyback authorization.

Outlook

In 2020, Boston Beer will report Dogfish Head's impact on 2020 shipments and depletion volume growth rates. However, it will not report the impact of Dogfish Head on earnings per share as the integration of the business is complete in early 2020.

The Truly, Twisted Tea and Dogfish Head brands remain the company’s key priorities for 2020. Consequently, it expects significant distribution and volume growth opportunities in 2020 for the Dogfish Head brands. Further, it will focus on returning Samuel Adams and Angry Orchard brands to long-term sustainable growth.

Based on these factors, the company outlined its view for 2020. Boston Beer estimates shipment and depletion growth of 15-25% for 2020. Excluding the Dogfish Head brands, shipment and depletion growth is expected to be 11-21%. National price increases are estimated between 1% and 3%.

Notably, the company expects shipment growth to be higher than depletions in first-quarter 2020, driven by continued supply chain and capacity management efforts to ensure that distributor inventory is adequate to support greater demand for brands during the peak summer months.

For 2020, it expects gross margin of 49-51%. Investment in advertising, promotional and selling expenses is envisioned to increase $80-$90 million. The increase is mostly attributed to higher spending for the launch of new flavors for the Truly brand, excluding any change in freight expenses for the shipment of products to distributors.

The company expects adjusted effective tax rate of 27%, excluding the impact of ASU 2016-09. It anticipates adjusted earnings per share of $10.70-$11.70 on current spending and investment plans.

Furthermore, the company expects capital spending of $135-$155 million for 2020, which will be mostly spent on continued investments in breweries and taprooms.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -12.74% due to these changes.

VGM Scores

Currently, Boston Beer has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision looks promising. Notably, Boston Beer has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.