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Boston Beer (SAM) Tops Q3 Earnings Estimates, Updates View

The Boston Beer Company, Inc. SAM reported better-than-expected third-quarter 2017 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. Also, the bottom line improved year over year.

Notably, the quarter marked the company’s fourth consecutive positive earnings surprise and second straight sales beat.

Q3 Highlights

Boston Beer’s third-quarter earnings per share of $2.78 topped the Zacks Consensus Estimate of $1.84 and improved 12.1% year over year. This outperformance stemmed from higher gross margin coupled with lower general and administrative costs and tax rate, somewhat compensated with decline in revenues due to lower volumes.

During the quarter, the company recorded a tax benefit of 4 cents owing to the adoption of the new Accounting Standard – Employee Share-Based Payment Accounting (ASU 2016-09), effective Jan 1, 2017.

Net revenue dropped nearly 3% year over year to $247 million. Excluding excise taxes, top line dipped 2.6% year over year to $264.1 million but outpaced the Zacks Consensus Estimate of $259 million. Further, shipment volume declined 4% to 1.1 million barrels and depletions were down 3.5%.

In the reported quarter, depletion volumes were mainly hurt by persistent decline in the Samuel Adams and Angry Orchard brands, as well as marginal adversity from the timing of the quarter, particularly related to the fourth of July holiday. This was partly mitigated by growth in Twisted Tea, and Truly Spiked & Sparkling brands.

Though management pointed to some improvement in the overall depletion trends from the beginning of the year, it stated that the on-premise channel remains tough. Further, trends in the craft beer and cider categories continued to remain soft. Also, challenges related to a competitive retail backdrop persist, providing lot of drinking options.

Meanwhile, Boston Beer continues to project soft depletion trends for 2017. Evidently, depletions for the year-to-date period through the 42 weeks ended Oct 21, 2017 are estimated to have declined nearly 6% from the comparable year-ago period.

Costs & Margins

Gross profit slipped 1.6% year over year to $131.5 million, while gross margin expanded 50 basis points to 53.2% in the quarter. The improvement in gross margin can be attributed to higher revenue per barrel that resulted from better pricing and package mix, along with lower brewery processing costs due to waste reductions and efficiency gains. These were partly mitigated by adverse fixed cost absorption owing to lower volumes.

Nevertheless, advertising, promotional and selling expenses remained flat at $63.6 million, owing to marginally greater media spending, which was offset by lower freight to distributors. This, in turn, resulted in lower volume and rates.

General and administrative expenses slumped 15.9% to $16.4 million, mainly due to declines in stock compensation associated with it’s retirement of its chief executive officer in 2018, along with salary and benefit costs, consulting and legal expenses.

Financials

As of Sep 30, 2017, Boston Beer had cash and cash equivalents of $70 million and total stockholders’ equity of $414.3 million.

During the nine months of 2017, the company generated approximately $108.2 million of cash from operating activities.

As of Oct 20, 2017, Boston Beer bought back about 884,000 shares worth roughly $130.5 million. With this, it had nearly $192.8 million remaining on the $931.0 million share buyback authorization.

Growth Plan

Management remains committed to a three-point growth plan. Firstly, revival of the Samuel Adams and Angry Orchard brands through packaging, innovation, promotion and brand communication initiatives. Moving forward, the company plans to launch new media campaigns for these brands. These innovations include Samuel Adams Sam '76, Samuel Adams New England IPA and Angry Orchard Rose, which are likely to be launched nationally in the first quarter of 2018. Additionally, it targets maintaining momentum for the Twisted Tea brand.

Secondly, accelerated focus on cost savings and efficiency projects with savings directed for further brand development. In this regard, the company has adjusted the organization to the new volume environment while at the same time retained its capability to innovate and return to growth. Evidently, the results of these initiatives reflected in gross margin improvements and lower operating expenses in the third quarter. On the back of this early success, Boston Beer reiterated the previously revealed target of improving gross margin by one percentage point every year through 2019.

Lastly, long-term innovation coupled with current focus in maintaining the leadership of Truly Spiked & Sparkling brand and ensuring it reaches full potential.

Furthermore, Boston Beer remains focused on making investments to revive hard cider category and Angry Orchard brand. Going forward, the company remains optimistic on the future of craft beer and cider category growth.

Markedly, this Zacks Rank #3 (Hold) company’s shares have gained 22% in the past six months compared with the industry’s growth of 10.9%. We believe these initiatives to drive growth and retain the stock momentum, going forward.

Guidance

Management updated its outlook for 2017. Depending upon the current spending and investment plans, adjusted earnings per share, excluding the impact of ASU 2016-09, are now estimated in the range of $5.60-$6.20 compared with the prior guidance of $5.00–$6.20. However, the company stated that the actual results may deviate significantly from current projections. Moreover, the company affirmed that 2017 will include 52 weeks versus 53 weeks in 2016.

Other assumptions for earnings include depletions and shipments changes of -7% to -4% compared with the previous forecast of -7% to 1%. In the meantime, Boston Beer continues to anticipate revenues per barrel to increase 1-2%. Gross margin is continued to be anticipated to range from 51-52%. Investment in advertising, promotional and selling expenses are envisioned to increase in the band of $10-$20 million compared with $20-$30 million, projected earlier.

Adjusted effective tax rate guidance for 2017 is maintained to be nearly 37%, excluding the impact of ASU 2016-09. Further, capital expenditures for the year are still guided in the band of $35-$45 million, which will be directed toward investment in breweries.

Also, management issued guidance for 2018. Depletions and shipments are likely to rise in low-single digits. Prices are expected to grow in 1-2% range. Gross margin expansion is guided from 52-53%, owing to the progress on the cost initiatives as well. Investment in advertising, promotional and selling expenses are envisioned to increase in the range of $15-$25 million.

Further, adjusted effective tax rate guidance for 2018 is anticipated to be roughly 37%, excluding the impact of ASU 2016-09. Capital spending is expected in the band of $55-$65 million in 2018, which can move higher per the requirements.

Looking for Solid Stocks, Check These

Some better-ranked stocks in the broader Consumer Staples sector include Constellation Brands, Inc. STZ, Brown-Forman Corporation BF.B and Energizer Holdings, Inc. ENR, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Constellation Brands, with a long-term earnings growth rate of 14.8%, has pulled off an average positive earnings surprise of 13.6% in the last four quarters.

Brown-Forman has delivered positive earnings surprise of nearly 18% in the last quarter.

Energizer, with a long-term earnings growth rate of 9.9%, has come up with an average positive earnings surprise of 23% in the trailing four quarters.

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