Boston Beer wins again with Hard Seltzer

Consumer tastes in the beer industry have changed dramatically over the past year, and boston beer (SAT 0.16% ) was one of the biggest beneficiaries of this change. While its main craft beer beverages are falling out of favor, the alcoholic beverage giant has gained far more influence on demand thanks to recent launches in the seltzer water and hard tea niches.

The company announced on Wednesday that these positive trends continued in the last quarter of 2019, marked by robust sales growth. Boston Beer is also forecasting more growth, although gains could slow significantly as new rivals flood into the hard seltzer segment.

Let’s take a look at the latest results and management’s outlook for 2020.

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Boston Beer sales and sellouts are still booming

Boston Beer’s pace of growth showed no signs of slowing down. In fact, sales jumped 34% to easily beat Wall Street targets. Burnouts, a measure of consumption, rose 22% to the high end of management’s annual outlook.

The Samuel Adams franchise has dwindled, as has the company’s Angry Orchard brand. Both products have seen sustained competition from new entrants in the craft beer and hard cider niches. However, Boston Beer made up for those losses with growing demand for its Truly hard seltzer and Twisted Tea franchises. The newly acquired Dogfish Head division also experienced solid growth. “Our burnout growth is attributable to our key innovations,” Founder and Chairman Jim Koch said in a press release, “the quality of our products and our strong brands.”

Rising costs eat into Boston Beer’s margins

Profitability took a big step back, with the gross profit margin dipping to 47% of sales from 52% a year ago, despite higher average selling prices. The decline was driven by pressure on the basic consumption the giant’s production and supply chains, which are struggling to meet all the demand for hard seltzer. Management had to shift some production to third-party brewers, which drove up expenses. The company also spent more money on marketing to support its brands.

Those pressures combined to push operating profit down to $18 million from $29 million in the year-ago quarter. However, the operating margin remained stable at 11% of sales for the whole of the 2019 financial year.

In anticipation of fiscal year 2020

Management expects additional cost pressures to persist at least through early 2021, and that factor has weighed on Boston Beer’s earnings outlook. The company expects earnings of between $10.70 and $11.70 per share this year.

The alcoholic drinks giant’s sales outlook covered a wide potential range, with exhaustion gains forecast between 15% and 25%. While this forecast implies another year of strong growth, it also reflects what management called a “challenging competitive environment” that will see several well-capitalized rivals rush into the hard seltzer niche.

Executives say their main challenge is to maintain the Truly brand in its market-leading position through innovative launches and aggressive marketing and distribution support. The launch of the new lemonade product is an important part of this strategy for 2020, but management said it’s still too early to tell how this product will appeal to consumers. In the meantime, investors can expect costs to continue to climb in the fiscal first quarter as Boston Beer scrambles to get inventory into the hands of retailers ahead of the peak summer sales months.

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