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Boston Beer Bubbles Up Despite Another Painful Quarter

By Steve Symington – Updated Oct 23, 2016 at 2:34PM

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Shares rose even after the craft brewer fell well short of expectations. Here's why.

Image source: The Motley Fool

Boston Beer (SAM -1.05%) stock climbed more than 4% Friday, after the company released third-quarter 2016 results, but that doesn't mean Boston Beer was toasting its own performance.

Boston Beer's headline numbers

In fact, on the surface there was little to like about Boston Beer's report. Quarterly revenue declined 13.5% year over year to $253.4 million, net income fell 18.4% to $31.5 million, and -- thanks in part to Boston Beer's repurchase of around 807,000 shares of Class A common stock for $138.4 million during the quarter -- net income per diluted share fell a more modest 13% year over year, to $2.48.

By comparison, and though we don't typically pay close attention to Wall Street's quarterly demands, analysts' consensus estimates predicted Boston Beer would achieve higher earnings of $2.60 per share on revenue of $279 million.

Depletions -- a key measure for how quickly Boston Beer's products travel from warehouses to consumer outlets -- declined 8% year over year, marking a negative acceleration from the metric's 5% slide last quarter. This also means that early improvements in depletions trends that management cited as of last quarter's report didn't hold for the duration of the quarter. To be fair, though, Boston Beer CEO Martin Roper did caution at the time that "it's too early to determine if these improvements are sustainable."

"Our total company depletion trends declined in the third quarter at a slightly faster rate as we lapped new beer launches from last year," explained Boston Beer founder and Chairman Jim Koch, "and we saw a further slowdown in growth across the craft-brewing industry."

Roper elaborated that depletions declines in Q3 were primarily driven by decreases in Boston Beer's flagship Samuel Adams, Angry Orchard, Coney Island, and Traveler brands, which were only partially offset by continued gains from the Twisted Tea, Truly Spiked & Sparkling varieties.

Thirsty to find growth again

So why did the market reward Boston Beer stock with Friday's jump? 

For one, keep in mind that Boston Beer is still down more than 30% over the past year as of this writing. That decline might be enticing for any investors still optimistic for the prospects of the craft-beer market over the long term. And Boston Beer isn't sitting on its heels as it continues to get pressed by both larger and smaller rivals encroaching on its niche.

In keeping with a comprehensive review of Boston Beer's brand messaging and packaging completed (ahead of schedule) last quarter, Koch noted that a "major packaging update for Samuel Adams Boston Lager has already shipped, to be followed by new Seasonal and Rebel packaging by the end of the fourth quarter."

In addition, Boston Beer expects to complete the national draft launch of its new Samuel Adams Rebel Juiced tropical IPA by the end of this month and has plans for "reimagining" its seasonal program with several promising new seasonal brews over the first three months of 2017.

On operational efficiency, financial guidance

But perhaps most intriguing were Roper's comments that Boston Beer is now conducting another comprehensive review, this time of its brand strategies and activation plans with the aim of ensuring "our investments are effective and efficient in building long-term brand equities."

This news naturally spurred some rumblings on Wall Street of whether Boston Beer might be considering whether to put itself up for sale. But until an actual acquisition scenario materializes -- and in light of management's decidedly long-term comments (more on that in a moment) -- I think investors would be wise to focus first on the actual business.

Image source: Boston Beer.

To that end, Boston Beer will also increase its focus on cost savings and efficiency projects. In doing so, it will aim to invest those savings into growing its brands, while preserving quality and service levels and maintaining a goal of increasing gross margin by 1% each year for the next three years.

In the meantime, Boston Beer now expects full-year 2016 earnings per diluted share of between $6.30 and $6.70, down from between $6.40 and $7.00 previously, assuming depletions declines of minus-6% to minus-2%, compared with previous guidance of minus-4% to flat from last year. Boston Beer also continues to expect price increases between 1% and 2%, with gross margin between 50% and 52%.

Boston Beer also offered a preliminary look at its assumptions for 2017, including a depletions change in the "minus low single digits to plus low single digits," continued national price increases of 1% to 2%, and gross margin of 51% to 53%, with the number increasing throughout the year with progress in the aforementioned cost initiatives.

Finally, Roper reiterated his decidedly Foolish (with a capital "F") stance, stating, "We remain prepared to forsake short-term earnings, as we invest to return to long-term profitable growth, commensurate with the opportunities and the increased competition that we see."

So while it's hard to swallow the fact this is the fourth straight quarter Boston Beer has lost market share in the face of industry headwinds and fierce competition, it should come as no surprise that patient investors were willing to stand by Boston Beer as it implements its plans to return to sustained growth going forward.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Boston Beer. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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