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Will Boston Beer's (SAM) Growth Strategies Aid Amid Cost Woes?

The Boston Beer Company, Inc. SAM looks well-poised for long-term growth, owing to innovation and product portfolio expansion. Its advancement in the non-beer categories, including ciders and hard seltzer, should continue to drive progress. We expect its intensified concentration on pricing, product innovation, growth of non-beer categories, and brand-building efforts to reinforce its position in the market. Its focus on improving Truly brand trends through a renewed focus on the core business, smart brand innovation, and strong distributor support and retail execution bode well.

Boston Beer has been witnessing momentum on strong shipment and depletion growth, excluding the Truly brand. The company reported better-than-expected earnings and sales results for third-quarter 2022. Additionally, the top and bottom lines improved on a year-over-year basis.

Better-than-expected earnings mainly resulted from top-line growth, an improved gross margin and lower operating expenses. The increase in the top line was mainly driven by a strong pricing performance across the portfolio, continued growth in depletions and shipments for the Twisted Tea brand, and positive early progress in Hard Mountain Dew.

However, depletions continue to be hurt by the slowdown in the hard seltzer business and supply-chain woes. Higher material and packaging costs and elevated inventory obsolescence costs  have been threats to  gross margin.

Shares of Boston Beer have gained 0.5% in the past three months compared with the industry’s rise of 6.5%. The Zacks Consensus Estimate for the Zacks Rank #3 (Hold) company’s current financial year’s sales and earnings suggests declines of 0.8% and 44.8%, respectively, from the year-ago period’s reported numbers.

 

Zacks Investment Research
Zacks Investment Research


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Factors to Drive Growth

SAM's focus on innovation to revive the Truly brand and expand Twisted Tea’s potential bodes well. Boston Beer is keen on bringing excitement to the Truly brand’s core flavors through innovation. The company’s innovation for the Truly brand — Truly flavored bottle Vodka — sold by Beam Suntory from the latter part of the first quarter of 2022, has been well-received by consumers. The company is optimistic about the Truly Vodka Seltzer launched in October 2022. With regard to revisiting the core flavors, the company announced the reformulation and improvement of core Truly flavors, including the addition of real fruit juice for an even smoother, easy-to-drink and refreshing taste.

Coming to Twisted Tea, the brand drove most of the improvements of Boston Beer in the third quarter. Being one of the top 20 fastest-growing brands in all beer for the past 12 months, Twisted Tea grew in double digits and emerged as the number one in FMB in the third quarter by growing 4.3 share points. The rise was driven by the improved distribution of 12 packs, and a unique product and brand positioning that resonates with more consumers.

We note that Boston Beer has made successful innovations in craft beer, and hard cider and iced tea categories over the years. The company is on track with growth of its Beyond Beer category, wherein it currently holds the 2nd position. Beyond Beer is growing faster than the traditional beer market, and the company expects the trend to continue for the next several years.

The company is also focused on accelerated cost savings and efficiency projects to aid margins. The company’s gross margin expanded 1,250 basis points (bps) year over year to 43.2%. The rise mainly resulted from increased costs in third-quarter 2021 related to the slowdown in hard seltzer and gains from pricing in third-quarter 2022. Going forward, the company expects to offset the impacts of higher commodity costs through price increases.

In third-quarter 2022, SAM’s operating expenses declined 11.7% year over year on lower advertising, promotional and selling expenses, partially offset by higher general and administrative expenses. Advertising, promotional and selling expenses declined on lower brand investments, particularly media costs, and reduced freight to distributors due to lower freight rates. Consequently, the company’s operating income of $38.4 million improved from an operating loss of $75.8 million reported in the year-ago quarter.

For 2022, the company expects investments in advertising, promotional and selling to decline $35-$45 million compared with a decrease of $30-$50 million mentioned earlier. The advertising, promotional and selling guidance does not assume any changes in freight costs for the shipment of products to its distributors.

Headwinds to Overcome

Boston Beer has been witnessing a slowdown in the hard seltzer category and the demand for the Truly brand in recent quarters. The slowing hard seltzer trends hurt the company’s depletions in third-quarter 2022. The Hard seltzer volume declined 17% in the third quarter and 15% for the nine months of 2022, in the measured off-premise channels. The hard seltzer category’s decelerating trend has mainly been attributed to the losing of novelty among consumers due to the entry of several beyond-beer products in the marketplace.

Additionally, the decline has resulted from the ongoing dismal macroeconomic environment, which has caused a volume shift from hard seltzers to premium light beers due to their lower pricing. The slowed hard seltzer sales mainly impacted the company’s Truly hard seltzer performance, which is expected to continue through the rest of 2022.

Boston Beer has been sensitive to changes in volume projections, mostly related to the hard seltzer category, supply-chain performance and inflationary impacts. It narrowed its 2022 view. For 2022, the company envisions adjusted earnings per share of $7.00-$10.00 compared with the $6.00-$11.00 mentioned earlier. Depletions and shipments are expected to decline 4-7% compared with a decrease of 2-8% stated earlier. The narrowed view mainly reflects expectations for continued gains in Twisted Tea and Hard Mountain Dew.

The company expects the 53rd week to aid depletion and shipment growth rates for 2022 by 1-1.5 percentage points. Depletion and shipment growth rates for the fourth quarter are expected to record gains of 4-6 percentage points from the 53rd week.

Boston Beer anticipates a gross margin of 42-43.5% for 2022 compared with the 43-45% mentioned earlier. The lowered guidance is a result of the impacts of higher inventory obsolescence, as well as lower brewery efficiencies due to the slowed ramp-up of the newly integrated variety pack lines. The company expects to offset the impacts of higher commodity costs through price increases.

Stocks to Consider

We highlighted some better-ranked stocks from the broader Consumer Staples space, namely Coca-Cola FEMSA KOF, PepsiCo PEP and Ambev ABEV.

Coca-Cola FEMSA produces, markets and distributes soft drinks throughout the metropolitan area of Mexico City in Southeastern Mexico and the metropolitan region in Buenos Aires, Argentina. KOF has a trailing four-quarter earnings surprise of 33.6%, on average. It currently has a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Shares of Coca-Cola FEMSA have risen 21.9% in the past three months. The Zacks Consensus Estimate for Coca-Cola FEMSA’s current financial-year sales and earnings suggests growth of 15.6% and 6.2%, respectively, from the year-ago period's reported figures. KOF has an expected EPS growth rate of 10.3% for three to five years.

PepsiCo is one of the leading global food and beverage companies. It currently has a Zacks Rank #2. The company has an expected EPS growth rate of 7.7% for three to five years. Shares of PEP have gained 8% in the past three months.

The Zacks Consensus Estimate for PepsiCo’s current financial-year sales and earnings per share suggests growth of 7.1% and 8%, respectively, from the year-ago period’s reported figures. PEP has a trailing four-quarter earnings surprise of 4.5%, on average.

Ambev is engaged in producing, distributing and selling beer, carbonated soft drinks, and other non-alcoholic and non-carbonated products in many countries across the Americas. ABEV currently has a Zacks Rank #2. Ambev has a trailing four-quarter earnings surprise of 4.4%, on average. Shares of ABEV have declined 3.1% in the past three months.

The Zacks Consensus Estimate for Ambev’s current financial-year sales and earnings suggests growth of 19.4% and 6.7%, respectively, from the year-ago period’s reported figures. ABEV has an expected EPS growth rate of 9.1% for three to five years.

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