Boston Beer Brews a Beat and Raise Following Its Dogfish Merger

In spite of continued challenges facing the craft beer market and the relative underperformance of its flagship Samuel Adams varieties, Boston Beer (SAM -0.43%) announced better-than-expected second-quarter 2019 results on Thursday after the markets closed. For that, the craft brewer once again credited the growing popularity of its Twisted Tea and Truly Hard Seltzer lines.

Of course, we can't forget that -- shortly after the quarter's end -- Boston Beer also closed on its $300 million merger with Dogfish Head Craft Brewery, diversifying its beer offerings and adding a lucrative source of incremental sales and profits in the process.

Let's settle in, then, for a more detailed taste of Boston Beer's performance to end the first half, as well as what investors should be watching in the coming quarters.

IMAGE SOURCE: BOSTON BEER

Boston Beer results: The raw numbers

Data source: Boston Beer. GAAP = generally accepted accounting principles.

What happened with Boston Beer this quarter?

• This quarter included a benefit to earnings of $0.02 per share related to the adoption of new accounting standards for stock-based compensation.
• Boston Beer does not provide specific quarterly revenue or earnings guidance. So while we don't typically lend much credence to Wall Street's expectations, most analysts were modeling significantly lower earnings of $1.95 per share on revenue of $309.8 million.
• Shipment volume grew 17% year over year to approximately 1.4 million barrels. 
• Depletions -- an industry metric to measure how fast products travel from warehouses to consumer outlets -- increased 17% year over year.
• Gross margin contracted 2.1 percentage points year over year to 49.9% (but also climbed 40 basis points from 49.5% last quarter), as cost-savings initiatives and price increases only partially offset higher processing and temporary labor expenses.
• In May, Boston Beer announced a $300 million deal to merge with Dogfish Head Craft Brewery, consisting of $173 million in cash and 429,292 shares of restricted Class A stock. The merger closed on July 3, and will add between 3% and 4% in annual shipments and depletions growth and between $50 million and $60 million in net revenue at gross margin of roughly 50%.

What management had to say

Boston Beer CEO Dave Burwick noted shipments growth in the first half outpaced depletions as the company actively worked to maintain adequate distributor inventory levels during the peak summer months. Similar to last quarter, Burwick again credited depletions growth to increases from the Truly Hard Seltzer and Twisted Tea brands, which were partially offset by declines from Sam Adams and Angry Orchard.

Burwick further noted that while the company is happy with its performance, accelerated depletions trends have proven "challenging operationally." He elaborated:

We have been operating at capacity for many months and have increased our usage of third-party breweries during the quarter in response to the growth. In particular, the additional Truly volumes have come at a higher incremental cost, due to an increased usage of third-party breweries and a higher percentage of variety packs in the company's overall mix, which is negatively impacting our gross margin expectation for the year. Our new automated variety pack can line in our Pennsylvania Brewery that began production this quarter should help relieve these pressures as it ramps up during the third quarter. We will continue to invest to increase capacity as appropriate to meet the needs of our business and take full advantage of the fast-growing hard seltzer category.  We're in a very competitive business and we are optimistic for continued growth of our current brand portfolio and we remain prepared to forsake short-term earnings as we invest to sustain long-term profitable growth, in line with the opportunities that we see.

Jim Koch, Boston Beer's founder and chairman, added the company continues to face a "general softening" in its niche of the craft beer category, particularly as consumers enjoy an "overwhelming number of options" in the beer aisle. Nonetheless, Koch says Boston Beer will continue investing to improve trends in an effort to return its flagship Samuel Adams varieties to sustained growth.

Looking ahead

Boston Beer also raised its full-year guidance to call for 2019 earnings per share of between $8.30 and $9.30 -- up from between $8 and $9 per share previously -- assuming depletions and shipments growth of between 17% and 22% (up from between 10% and 15% before). Meanwhile, Boston Beer narrowed its target for 2019 gross margin to between 50% and 51% (from a high end of 52% before).

In the end, Boston Beer certainly has work to do before it's truly firing on all cylinders. But as long as it can sustain growth with the help of acquisitions and its Truly Spike and Twisted Tea options, you'll be hard-pressed to find too many shareholders willing to complain about its consolidated performance.