The Boston Beer Company Inc. SAM is witnessing robust top-line trends on solid shipment and depletion growth. Further, the company is poised to gain from increased investments in the Truly brand, which will likely bolster its position in the fast-growing hard seltzer category. Additionally, its commitment toward reviving its Samuel Adams and Angry Orchard brands, cost-saving initiatives and long-term innovation should bolster performance.
However, incremental costs for the use of third-party breweries and introduction of variety packs are likely to dent gross margins. Additionally, higher operating expenses remain a headwind.
Backed by aforementioned positives, shares of the company have gained 54.2% in a year compared with the industry’s 15.5% growth.
With the lingering headwinds, let’s see how this Boston, MA-based alcoholic beverages company will retain stock momentum.
Factors Favoring the Stock
Boston Beer has been lately witnessing robust trends for the Truly Hard Seltzer and Twisted Tea brands, which have been driving depletions. Notably, the Truly brand delivered triple-digit volume growth in the third quarter, while Twisted Tea generated double-digit volume growth. The company is focused on promoting the Truly brand to take advantage of a shift in the consumer preference to the fast-growing hard seltzer category.
In the third quarter, it launched Truly Draft nationally and continued to expand package distribution across all channels. It is also initiating a high-profile advertisement campaign for Truly, featuring the famous comedian, Keegan-Michael Key. Furthermore, the company’s recent multiyear U.S. partnership with the National Hockey League (NHL) is making its Truly Hard Seltzer the official drink of the League. The partnership not only benefits the Truly brand but also extends benefits to other brands, including Samuel Adams and Dogfish Head.
Additionally, the company is launching the latest formulations for all Truly flavors to make the brand the best-tasting hard seltzer around. In early 2020, it plans to launch the Truly Hard Seltzer Lemonade in both 12-pack and single-serve sizes. It also expects to roll out another flavor, Watermelon Kiwi, which will be available in Truly Tropical Variety Pack and 6-packs. With these new flavors, the NHL partnership and new ad campaign, we believe the company will be able to strengthen its position as a leader in the hard seltzer category, while making Truly a core brand.
Furthermore, Boston Beer is on track to revive its most popular brand via packaging, innovation, promotion and brand communication initiatives. This is part of its turnaround efforts to bring the Samuel Brand back on the growth trajectory. Also, the company focuses on accelerating cost savings and efficiency projects, with savings directed toward brand development.
Going forward, Boston Beer is likely to continue with its solid shipment growth trend, driven by efforts to manage inventory levels in the wake of increased customer demand. Moreover, major innovations, quality of products and strong brands alongside solid sales execution and support from distributors have collectively been aiding depletion. Additionally, increases in Truly Hard Seltzer and Twisted Tea brands as well as the inclusion of Dogfish Head brands are contributing to depletion growth.
Management expects the strong depletion and shipment trend to continue in fiscal 2020, as evident from its projection of growth between high teens and low twenties.
Factors Hindering Growth
Though the aforementioned factors make us optimistic about the stock’s potential, there are some hurdles in its growth path. The most prominent concerns are soft gross margin and higher operating costs.
Boston Beer has been witnessing incremental costs due to the use of third-party breweries and a higher proportion of variety packs in its overall product mix, which is hurting margins. Additionally, higher advertising, promotional and selling expenses along with increased general and administrative costs remain a threat to its overall profitability.
The company expects these headwinds to continue in 2020, with projected gross margin of 49-51%. Additionally, investments in advertising, promotional and selling are projected to increase $65-$75 million in 2020.
The above discussion suggests that Boston Beer’s growth efforts might offset the hurdles. Further, the Zacks Rank #3 (Hold) company’s expected long-term earnings growth rate of 10% and Growth Score of A speak well of its growth potential.
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