Boston Beer (NYSE:SAM) released second-quarter 2016 results Thursday after the bell, revealing its flagship Samuel Adams brand lost market share for the third quarter in a row. But with shares up around 3% in after-hours trading as of this writing, it's obvious the craft brewer did something right over the past three months.
Quarterly revenue fell 2.9% year over year, to $244.8 million, while net income dropped 11.1%, to $26.6 million. Thanks to share repurchases over the past year -- including 743,000 shares bought back so far this year for $127.7 million -- earnings per diluted share declined a more modest 5.5%, to $2.06. Note Boston Beer doesn't usually offer specific quarterly financial guidance. For perspective, and with the caveat that we don't pay close attention to Wall Street's near-term demands, analysts' consensus estimates called for lower earnings of $1.94 per share on revenue of just $238.9 million.
We've tasted this brew before
But the story of its last few quarters remains largely the same.
Boston Beer CEO Martin Roper admitted depletions volume -- a key measure for how quickly their products travel from warehouses to consumer outlets -- remained "significantly" below expectations in both the second quarter and first of half of the year. This time, Roper explained, depletions weakness persisted as decreases in Boston Beer's Samuel Adams, Angry Orchard, and Traveler brands were only partially offset by growth from Twisted Tea, Coney Island, and the more recently introduced Truly Spiked & Sparkling varieties.
Boston Beer founder and chairman Jim Koch added depletions declined in Q2 at a rate roughly consistent with last quarter's trends, driven by increased competition despite the fact growth in the "better beer" and craft categories remains healthy. Koch also elaborated they've enjoyed continued success following last quarter's launch of new beers, including the Samuel Adams Nitro series and Samuel Adams Rebel Grapefruit IPA. But those successes couldn't make up for the continued declines of Samuel Adams Boston Lager and Samuel Adams seasonal offerings. On a sweeter note, Angry Orchard has maintained its high share despite what the company views as temporary declines for the broader cider category, which only arrived after several years of high growth.
"We are encouraged by recent improvements..."
Roper did, however, offer a potential light at the end of the tunnel, stating, "We are encouraged by recent improvements in depletion trends that we have seen since the middle of June, but it's too early to determine if these improvements are sustainable."
In addition, following a comprehensive review of its brand messaging and packaging last quarter -- which was previously expected to conclude some time in the second half -- Boston Beer now anticipates introducing new packing and advertising in the second half of this year to support planned upticks in promotional activity. That includes the now-in-progress national rollout of the Truly Spiked & Sparkling brand, which Boston Beer says has seen solid support from distributors, retailers, and drinkers alike. And if Truly Spiked & Sparkling receives a similar positive response on a national level, Boston Beer is prepared to increase investment in the brand above its current plan.
Finally, Boston Beer reduced its full-year earnings guidance, and now expects earnings per diluted share between $6.40 and $7.00 (compared to between $6.50 and $7.30 previously). The new range assumes a change in depletions and shipments of minus 4% to flat from last year (compared to minus 4% to growth of 2% previously), price increases between 1% and 2% (consistent with last quarter), and gross margin between 50% and 52% (compared to between 51% and 53% previously).
Meanwhile, Boston beer anticipates a change in investment in ad, promo, and selling expenses between a decrease of $5 million and an increase of $5 million from last year, marking a reduction from previous guidance calling for these expenses to be flat to up $10 million over 2015.
But after three straight quarters of losing market share and watching Boston Beer stock decline more than 18% year to date, it's unsurprising to see the market willing to give it a pass for that selective guidance reduction in light of the recent improvements in depletions trends. If Boston Beer is able to execute its national rollout of a promising new brand while at the same time bucking the competitive headwinds that have held it back of late, I think patient, long-term investors will be more than happy they held on.