Boston Beer (NYSE: SAM) justified its pricey valuation in the third quarter of 2013, with revenue up some 30% over the prior-year period. Still, investors have been lukewarm on the stock since. Earnings guidance for the full year came in a little lighter than many were expecting, and competition in the U.S. beer marker continues to intensify.
Boston now trades at about 14% off its peak, and Tuesday's earnings report should give investors an indication of whether that last quarter was a sign that Boston Beer is building strength to continue taking share in a hyper-competitive market.
Let's take a look at three key areas Boston Beer management may discuss in the fourth-quarter conference call.
Is consolidation under way?
The number of brewers in the U.S. is booming, but over the last couple of quarters, Boston Beer executives have said they are beginning to see bars and stores starting to consolidate their offerings, realizing that too large a selection has been leaving them with unsold beer taking up space on shelves or coveted tap handles at taverns.
Chairman and founder Jim Koch referred to it as "variety fatigue." Store and bar managers are finding that the sheer variety of available beers is making ordering and stockkeeping more challenging, and bar owners are finding that the constant churn of tap handles can confuse serving staff, Koch said. That fatigue benefits Boston Beer, a familiar craft name whose products turn over well, Koch believes.
We also heard similar remarks from the megabrewers, including Anheuser-Busch InBev (NYSE: BUD) CEO Carlos Brito, who said he saw a similar trend and reminded analysts that national brands still make up more than 90% of U.S. beer sales.
Molson Coors' (NYSE: TAP) recent quarterly numbers offer further validation. The company reported double-digit growth of its "above-premium" labels, and said those brands make up close to a third of all the growth in the craft beer sector.
Bigger beer, bigger costs
Boston Beer is seeing a shift to more flavorful, more hoppy beers, it said in October. That's good for the Sam Adams maker, which has a wide assortment of quality India pale ales, including the recently released West Coast-style Rebel IPA.
The downside of the shift to these types of beers is that they simply cost more money to produce. The company said that to offset those costs, it planned to increase prices on some products. With the industry as competitive as it is, Boston Beer had previously not been confident it could do that for at least a few years, CEO Martin Roper said.
But it was seeing signs last fall that megabrewers A-B InBev and Molson Coors were starting to hike prices on some beers, giving Boston Beer the opportunity to do the same and still not look overpriced next to Blue Moon, Shock Top, and Leinenkugel on store shelves. Last quarter, A-B InBev said it rolled out price increases in some U.S. markets at the end of September, with more on the way in November. Typically, Boston Beer and other large craft beer makers like Craft Brew Alliance wait for the megabrewers' lead on price hikes, then follow with their own.
Investors will want to stay tuned to hear what Boston Beer says about that shift to hoppier, more flavorful beers, and also whether Boston Beer has been able to impose price increases to keep its margins intact.
Boston Lager at 30
Last quarter, company officials were excited to report that flagship Sam Adams Boston Lager was growing, and just in time to celebrate its 30 birthday in 2014. This is a sign of the strength of the Sam Adams brand overall, and it bucks the trend seen with many of the larger, more well-established American lagers, like Budweiser.
Boston Beer wants to build on that momentum for Boston Lager's milestone birthday in 2014. We can expect the company's increased ad spending to promote the flagship brand. Investors will want to stay tuned to see what the company's plans are for Boston Lager's 30th.
The Foolish bottom line
Boston Beer is fighting to gain share in a hyper-competitive U.S. beer market. To date, it's done well. But to continue to grab share -- and do so profitably -- it needs some things to fall into place. Consolidation around established craft brands certainly benefits the country's biggest craft brewer. The ability to hike prices will help.
Boston Lager will celebrate its 30th birthday this year. Tuesday's report will help to set the stage for the coming year.
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