Boston Beer (SAM) Up 34% Since Last Earnings Report: Can It Continue?
A month has gone by since the last earnings report for Boston Beer (SAM). Shares have added about 34% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Boston Beer due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Boston Beer Q2 Earnings Beat, Sales Up Y/Y
Boston Beer Company reported upbeat second-quarter 2020 results, wherein top and bottom lines beat estimates and increased year over year. Despite impacts of the coronavirus outbreak in early March, its business saw significant growth in the second quarter. Boston Beer’s second-quarter adjusted earnings of $4.69 per share surpassed the Zacks Consensus Estimate of $2.20. Further, the bottom line grew almost two folds from $2.34 earned in the year-ago period, mainly driven by an increase in revenues on the back of shipment growth to the tune of 39.8%. This was partly offset by dismal gross margins and a rise in operating expenses.
The company has been witnessing a significant reduction in keg demand from the on-premise channel, and higher labor and safety-related costs at its breweries, as a result of the ongoing pandemic. In second-quarter 2020, it recorded nearly $4.1 million of coronavirus-related pre-tax reductions in net revenues and increases in other costs. This included $5.8 million related to reduced revenues due to keg returns from distributors and retailers and $8.3 million of other COVID-19-related costs, of which $5.6 million was recorded in cost of goods sold and $2.7 million in operating expenses. Further, COVID-19-related safety measures led to the reduction in internal capacity, shifting more volumes to third-party breweries. This resulted in higher production costs and negatively impacted gross margin.
Net revenues advanced 42% year over year to $481.1 million and exceeded the Zacks Consensus Estimate of $419 million. Excluding excise taxes, the top line rose 42% year over year from $452.1 million. The increase in the top line can primarily be attributed to a 39.8% improvement in shipments to 1.9 million barrels. Excluding the addition of the Dogfish Head brand, beginning Jul 3, 2019, shipments increased 35.3%. Depletions grew 46%, including a 42% rise from Boston Beer legacy brands and 4% from the addition of the Dogfish Head brand. This marked the ninth successive quarter of double-digit growth in depletions, backed by strength in Truly Hard Seltzer and Twisted Tea brands along with, the Dogfish Head brand. This was somewhat offset by sluggishness in Samuel Adams and Angry Orchard brands.
Depletions for the year-to-date period through the 28 weeks ended Jul 11, 2020, have grown nearly 42% from that witnessed in the year-ago period. Excluding the Dogfish Head brewery, depletions grew 37%.
Costs & Margins
Gross profit improved 31.8% year over year to $209.6 million. However, gross margin contracted 350 basis points to 46.4% due to elevated processing costs, stemming from higher production at third-party breweries. Further, higher prices and cost savings at company-owned breweries hurt gross margin.
Advertising, promotional and selling expenses rose 6.7% in the quarter to $100.3 million. The increase was driven by higher investments in media and production; expenses related to the inclusion of Dogfish Head brand beginning Jul 3; higher salaries and benefits costs; and increased freight to distributors due to higher volumes. On the flip side, reduced investments in local marketing and national promotions acted as deterrents. General and administrative expenses totaled $29.7 million, up 11% from the year-ago quarter. The increase was mainly driven by higher salaries and benefits costs as well as the addition of Dogfish Head’s general and administrative expenses beginning Jul 3, 2019. This was somewhat offset by a one-time cost of $1.5 million related to the Dogfish Head transaction, which was incurred in the second quarter of 2019.
As of Jun 27, 2020, Boston Beer had cash and cash equivalents of $86.7 million and total stockholders’ equity of $827.5 million. The company currently has $150 million in its line of credit for use to enhance the cash position and liquidity amid the coronavirus pandemic. During the second quarter and the period between Jun 28 and Jul 18, Boston Beer did not repurchase shares. As a result, the company has $90.3 million remaining under the $931-million share buyback authorization.
Management foresees increased investments in the second half of 2020 as compared to the first half, along with accelerated growth in Truly, Twisted Tea and Dogfish Head brands. Notably, the Truly Hard Lemonade is witnessing solid growth and expected to continue this momentum. During the second quarter, Samuel Adams Boston Lager and Angry Orchard Crisp Apple have recorded double-digit growth in the off-premise channels. However, overall Samuel Adams and Angry Orchard's volumes remained drab due to COVID-19-related impacts and are projected to decline for the rest of the year, given the store closures. That said, it is on track to reopen its store locations with increased focus on outdoor service and takeout.
Further, the company is making efforts to recover its supply-chain operations, which will remain pressurized in the second half of the year. Apart from these, higher usage of third-party breweries to meet consumers’ growing demand are likely to lead to additional costs, which might weigh on margins in 2020. Going ahead, Boston Beer has issued 2020 guidance on the back of depletions and shipment growth as well as solid performance in Truly and Twisted Tea brands.
For 2020, management envisions the bottom line to be $11.70-$12.70 per share. Also, depletions and shipments are likely to grow 27% and 35%, respectively, wherein the addition of the Dogfish Head brand is expected to contribute 1-2%. Moreover, gross margin is anticipated to be 46-48%. Advertising, promotional and selling expenses are forecasted to be $70-$80 million and capital expenditure is likely to be $180-$200 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted -13.84% due to these changes.
Currently, Boston Beer has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions indicates a downward shift. It comes with little surprise Boston Beer has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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