Did Boston Beer Company Just Go Stale?

Shares of Boston Beer (NYSE: SAM  )  lost their fizz Thursday, falling 11% during intraday trading after the company gave investors a headache with its first-quarter 2013 results.

The numbers
On one hand, Boston Beer's first-quarter revenue increased an impressive 20% year over year, to $135.9 million, primarily due to core shipment growth of 18%, but also, in part, to a 1% price increase instituted by the company. That number, at least, handily beat analyst estimates, which called for sales of $129.9 million.

On the other hand, net income fell 8% from the year-ago period, to $6.9 million, or $0.51 per share, falling well short of analysts' expectations for earnings of $0.60 per share.

So what happened?
Unfortunately, while depletions grew by a record 16% on the strong performance of Boston Beer's cider and tea brands, the company experienced "slight softness" in its Samuel Adams sales after its spring seasonal program failed to meet expectations. Even so, the company is looking forward to better days ahead, and has already completed the conversion to its popular Summer Ale in most markets. In addition, advertising and selling expenses rose by $7.2 million, or 19% in the quarter.

As a result, first-quarter gross margin fell to just 50%, down from 55% in the year-ago period. Curiously, however, Boston Beer is maintaining both its full-year gross margin target of between 53% and 55%, and also reiterated its full-year 2013 earnings per diluted share guidance of $4.70 to $5.10.

The aluminum lining
To management's credit, they did warn during last quarter's conference call that anticipated price increases wouldn't fully cover their cost pressures and product mix changes. What's more, they also told investors they would be increasing advertising, promo, and selling expenses by between $18 million and $26 million for the year. While the $7.2 million increase in the first quarter does eat up more than its fair share of that range, it wasn't that far out of bounds.

Even still, those falling margins are admittedly worrisome, and nobody likes to see year-over-year earnings decrease -- especially after a 20% increase in sales.

So how does Boston Beer plan to make up for this quarter's shortfall? 

Cans, for one thing. I voiced my excitement in February for the company's brews to go on sale in their new innovative can sometime this summer. As luck would have it, founding CEO Jim Koch clarified this morning that the new cans would be available in May, as the company recently finished installing a can line capable of filling the unique design.

Source: Boston Beer.

That said, Koch also noted he's seeing "increased competitive activities from both domestic specialty and craft beer brands that have made it challenging to grow Samuel Adams as fast as [they] would like." Sure enough, remember that brewing giant Anheuser-Busch InBev (NYSE: BUD  ) owns a significant stake in the comparatively tiny Craft Brew Alliance, which boasts popular craft beers from both Widmer Brothers Brewing and Redhook Ale Brewery.

If that weren't enough, AB-InBev also took a direct shot at Boston Beer's new container just a couple of weeks ago by unveiling its very own new bowtie-shaped can, which is set to arrive in stores just a few days from now.

Foolish final thoughts
However, I'm still unfazed by today's drop, and remain convinced that Boston Beer's superior brews are the key to long-term success in the industry. In the end, though the stock might look a little rich for your taste at nearly 34 times trailing earnings, I stand by my assertion last quarter that buying shares of Boston Beer will prove an incredible investment for patient investors over the long run.

More expert advice from The Motley Fool
Boston Beer's Samuel Adams brand helped to redefine beer, and kick off the craft beer revolution in the United States. Success breeds competition, though, and while just a few years ago, Boston Beer had claim over most of the craft beer shelf, today the field is crowded. Can Boston Beer rise above the rest, or will it be squeezed between small local breweries on one side, and global beer giants on the other? To help you decide, we've compiled a premium research report filled with everything you need to know about Boston Beer's risks and opportunities. Just click here now to find out whether Boston Beer is a buy today.


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