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Is Boston Beer's Recovery About to Run Off the Rails?

Although Boston Beer's (NYSE: SAM) third-quarter earnings were seen as something of a mixed bag, they should worry investors enough that whatever recovery was taking shape is about to go flat.

Even if certain trends are moving in the craft brewer's direction, the overall direction is down, and it soon won't have any levers to pull to camouflage the carnage. What was already looking like a gloomy forecast could very well turn downright dismal.

Image source: Boston Beer.

The sinking flagship brand

The biggest problem remains Boston Beer's continuing inability to sell more of both its Samuel Adams beer and its hard cider brand Angry Orchard. Both are caught in the vortex pulling them lower, and without its two biggest contributors, regardless of the strength exhibited by any of its smaller brands, there's little hope for a recovery.

Depletions fell 3.5% for the quarter, and though that's actually worse than the 3% decline seen in the second quarter, it's dramatically better than the 8% plunge Boston Beer experienced in the year-ago period. Depletions are sales to distributors and retailers and are considered an industry proxy for consumer demand. Still, it shows Boston Beer is not heading in the right direction despite have introduced new flavors that were supposed to staunch the hemorrhaging as well as offering new packaging, though that was never really the problem for the brewer.

Founder and Chairman Jim Koch rattled off a litany of woes confronting his company and the industry, including a soft craft beer and cider market, a weak retail environment, and increased competition.

Unfortunately, it looks as if management hasn't learned the right lessons from its continued failures. It's making a lot of the same mistakes like coming out once again with new beer flavors in an attempt to perk up interest, while also putting a lot of stock in the Truly brand of hard seltzer that has been a rare source of strength.

Image source: Boston Beer.

A truly transitory phenomenon

The problem with Truly is that packaged goods stores remain leery of giving the beverage too much space because they got burned by the "boom-splat" phenomenon that Koch has referred to of hard soda. After the alcoholic soft drink rocketed out of the gate, it quickly fell off a cliff, so retailers don't want to get caught out there again and have been reluctant to stock the hard seltzer.

Worse, not only is Boston Beer lapping Truly's introduction of the drink in the fourth quarter, which will likely make any gains seem much more muted than they've been, but it is now seen as largely another seasonal, one primarily good for the summertime.

CEO Martin Roper noted that the industry analysts at IRI see sales from the peak period to the winter lows plunge 50% or more, though Boston Beer feels they'll still be able to play around the edges and gain "pockets" of distribution during the beverage's hibernation.

Hit or miss

As for the new beers it will be bringing to market, one seems interesting, the other derivative. Sam '76 is described as a "sessionable lager" that drinks like an ale, which could turn into an innovative new beer. The second is Samuel Adams New England IPA, a trendy brew in a category already being exploited by others. Where west coast IPAs are known for their clarity (and their bitter, hoppy flavor), the so-called New England IPAs revel in the beer's cloudiness. The niche has a bit of a cult following, but there's no guarantee it will catch on with wider audiences. It is also an example of Boston Beer following the crowd once again, just as it did with its Rebel IPA and Nitro beers, rather than blazing a new path itself (like Sam '76 seemingly does).

It will also be introducing a new rose cider under Angry Orchard, but whether there's any interest in that, let alone enough to revive the category, remains to be seen.

From the looks of it, Boston Beer is stuck. Its flagship brand is in a downward spiral that no amount of reimagining of it has been able to stop. The second most important brand is now following it down. While Twisted Tea remains a perennial favorite, the brewer has failed to replicate that success on an extended basis with any of its subsequent product launches.

What it's trying to do to get out of the rut looks a lot like what it's tried in the past, and that hasn't worked. Boston Beer is caught in a vise between the megabrewers on one jaw crowding out shelf space and by the craft beer industry on the other, blazing new paths that it is left to follow. The prognosis for a recovery in which it's able to sustain itself doesn't look encouraging.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Boston Beer. The Motley Fool has a disclosure policy.