Boston Beer (NYSE: SAM) might consider changing its name if sales trends stay this way for much longer. On Thursday, the alcoholic beverage giant announced that its flagship Samuel Adams franchise shrank in the fiscal second quarter. Its Angry Orchard cider brands declined, too, as restaurants and bars closed their doors or scaled back services in recent months.
But while management sees these declines lasting through the rest of 2020, Boston Beer raised its overall growth outlook to over 30%, even as rivals from Molson Coors (NYSE: TAP) to Constellation Brands (NYSE: STZ) are seeing flat or declining results.
Investors can thank the Truly hard seltzer brand and the Twisted Tea collection for powering head-turning growth for Boston Beer this year.
A powerful combination
The company noted a significant decline in keg sales to restaurants and bars in Q2, which runs from late March through late June and captured some of the most intense impacts from COVID-19 closures. Demand for these products, especially in the Sam Adams and Angry Orchard portfolios, has recovered as stores reopened. But management is expecting the brands to continue shrinking for the full year while bar business stays muted.
The news couldn't be better for its non-traditional releases, though. Consumers turned toward the Twisted Tea and Truly hard seltzer franchises during the pandemic's early days. Sales gains spiked at retailers, management said, and in both cases accelerated beyond the blistering rate set in the second quarter.
In fact, Boston Beer estimates that Truly is the only established hard seltzer brand to have gained market share so far in 2020. That success allowed overall depletions to accelerate to 46% from 32% in Q1. Constellation Brands, by comparison, recently posted 6% depletion growth.
Odds and ends
It wasn't all good news in this report. Boston Beer endured spiking costs related to its shift toward using third-party brewers to relieve manufacturing output challenges. COVID-19 restrictions amplified that impact, which helped push gross profit margin down to 46.4% of sales from 49.9% a year ago.
Boston Beer is also struggling to satisfy basic demand from many of its retailing partners. "We have been experiencing out of stocks," CEO Dave Burwick said in a press release, "and we expect wholesaler inventories to remain very tight for the rest of the summer." The inventory pressure will result in some lost sales opportunities.
That production issue might open the door to hard seltzer challengers like Constellation Brands' Corona brand or Molson Coors' new Vizzy franchise. But Boston Beer believes it can continue winning market share in this growing category even as more competition floods the niche, just as it has done over the last six months.
Management is putting some serious resources behind that goal, with plans to significantly scale up advertising for the Truly and Twisted Tea brands through the end of 2020. This initiative will further pressure profitability over the short term, but should generate strong overall returns.
Meanwhile, the consumer staples specialist isn't abandoning Samuel Adams or Angry Orchard and still believes in the long-term potential of these valuable franchises. But its clear that some of its other brands are resonating more with consumers in an era of decreased on-premises drinking occasions.
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Demitrios Kalogeropoulos owns shares of Boston Beer. The Motley Fool owns shares of and recommends Boston Beer and Constellation Brands. The Motley Fool has a disclosure policy.
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