Why Craft Brew's Earnings Were Not as Good as They Looked

The numbers looked good for Craft Brew Alliance (BREW) in the first quarter, but investors shouldn't get too excited just yet. While the 20% year-over-year revenue growth figure looks impressive -- and in line with the overall craft beer market, finally -- it's not quite as exciting as it seems at first blush.

That's mostly because the first quarter of 2013 that it's being compared to was a particularly bad one for Craft Brew. The brewer posted a loss that quarter of $1.77 million on sales that grew an anemic 5% over 2012. Sales of its Widmer Brothers brand were down 12%, and Redhook sales -- one of the key drivers of growth for the company -- were up just 6%.

With that backdrop, the seemingly impressive sales numbers and margin expansion coming out of the corresponding quarter in 2014 are not as stellar as they might first appear. What's more, the numbers still fall well short of what we saw Boston Beer (SAM 2.52%) report just a week or so earlier. The Sam Adams maker's sales were up 35%. The company is clearly grabbing share in the fast-gowing craft segment, and management made no bones about their plans to strike while the iron is hot. Boston Beer plans increased investments in marketing its beers, ciders, and Twisted Teas.

More beers, same shelf space
Craft Brew acknowledged the tough, competitive environment it's operating in, where shelf space and tap handles are about maxed out but new beers are entering the market all the time. A key player in this environment is megabrewer Anheuser-Busch InBev (BUD 0.13%), which is rolling out its Goose Island craft beers nationwide, and plans an advertising blitz of its own for the highly regarded Chicago-based craft label.

In February, Anheuser-Busch CEO Carlos de Brito said Goose Island's volumes were up 70% over the prior year. That was before the advertising blitz. A-B has a powerful distribution network and carries a lot of clout with retailers. We can expect that Goose Island will get its fair share of space.

So, if you're a Craft Brew investor, don't get too worked up just yet.

But it's not like the keg's kicked
Still, there were plenty of bright spots in the first-quarter report, giving investors reason to believe the much-promised growth story at Craft Brew is indeed about to get started.

Three of its four brands -- Kona, Redhook, and Omission -- maintained double-digit growth. The company also says its Portland-based Widmer Brothers brand is showing "clear signs of renewal" as it enters its 30th year of operation. Widmer's best-selling beer has long been its hefeweizen -- a German-style wheat beer -- and the company says that drinkers introduced to the style by beers like MillerCoors' Blue Moon are trading up to Widmer. That's a good sign.

Craft Brew is also getting closer to starting production at Memphis' Blues City Brewery, an arrangement that should help serve its fastest-growing markets in the East and reduce distributing costs over time.

Less gluten, more wings
Its gluten-free Omission brand grew in the triple digits, the company said. The beer, brewed with traditional grains, unlike A-B's sorghum-based Redbridge gluten-free beer, is capitalizing on a popular dietary trend, as the move to avoid gluten has spread far beyond those with allergies to the protein. Craft Brew believes that a new partnership with Olive Garden restaurants will help to further drive Omission sales.

Its partnership with Buffalo Wild Wings is also paying off for the brewer. The popularity of the Redhook Game Changer ale that it sells exclusively at B-Wild is helping to drive sales of other beers in the Redhook portfolio, such as Long Hammer IPA, the company says. Even better, CEO Andy Thomas said it appears to be having an even wider "halo" effect, leading to increased sales of some of Craft Brew's other labels.

"There's definite evidence that says that a high tide raises all ships for our portfolio there," Thomas said.

The Foolish bottom line
While Craft Brew's first quarter was not quite the blowout the numbers might have suggested at first blush, the company does have a lot going on that should give investors hope. The long-promised growth story hasn't arrived quite yet, but things are certainly looking up for the brewer. Investors will want to stay tuned to see how well the company navigates its way through the highly competitive market while bigger players like Boston Beer and Anheuser-Busch InBev push hard to take more share.