Boston Beer (NYSE:SAM) released third-quarter 2019 results on Tuesday after the markets closed. Investors don't seem particularly impressed, with shares of the craft brewer falling as much as 2% early Wednesday before recovering to close down around half a percent.

But make no mistake -- even bolstered by the company's recent $300 million merger with Dogfish Head Craft Brewery -- and without the benefit of growth from its flagship Samuel Adams and Angry Orchard varieties -- this was as strong a performance from Boston Beer as any investor could have hoped for in light of today's increasingly crowded beer aisles.

Let's dig deeper, then, for a better idea of what Boston Beer accomplished in Q3 relative to the same year-ago period, as well as what investors should be watching in the coming quarters.

Metric Q3 2019 Q3 2018 Change

Net revenue

$378.5 million

$306.9 million

23.3%

GAAP net income

$44.7 million

$38.0 million

17.6%

GAAP earnings per diluted share

$3.65

$3.21

13.7%

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

Perspective is in order

To be fair, Boston Beer's GAAP earnings growth faced a difficult comparison this quarter, given a one-time $0.38-per-share benefit in last year's third quarter related to the adoption of new tax accounting changes under the Tax Cuts and Jobs Act. Still, these results effectively smashed analysts' consensus estimates for earnings of $2.93 per share on revenue closer to $369 million.

Meanwhile, top-line growth was largely driven by a 19.1% increase in shipment volume, to 1.6 million barrels. And depletions -- a key industry metric to gauge how quickly Boston Beer's products travel from warehouses to consumer outlets -- jumped 30% year over year, or 24% excluding the addition of Dogfish Head brands in early July. Similar to last quarter, that growth was driven entirely by Boston Beer's Twisted Tea and Truly Hard Seltzer brands, and partially offset by continued weakness from Angry Orchard and Samuel Adams.

Trending toward the bottom line, Boston Beer's gross margin contracted 1.6 percentage points year over year to 49.6%, once again hurt by increased processing costs given its reliance on third-party breweries (and temporary labor at company-owned breweries) to help meet surprisingly strong demand for variety-pack offerings.

Samuel Adams glass being filled from tap with foam pouring over edge.

IMAGE SOURCE: BOSTON BEER

On investing for future growth

Boston Beer CEO Dave Burwick stated that the company is "making good progress on the integration" of Dogfish Head and will sustain a focus on driving cost savings and operational efficiency to help fund investments in brand innovation and incremental marketing.

But Burwick elaborated that Boston Beer has strained to meet the challenges that come with accelerated depletions growth, leaving the company "operating at capacity for many months" now.

As such, to "relieve some capacity pressures" and support expected volume growth next year, Boston Beer will add a can line at its Pennsylvania Brewery while increasing its "sleek can" capacity at third-party breweries.

"While we are in a very competitive business, we are optimistic for continued growth of our current brand portfolio and innovations, 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," he added.

In the meantime, Boston Beer now expects 2019 depletions and shipments will increase between 19% and 22%, an increase on the bottom end from its previous guidance for between 17% and 22%. Boston Beer also reiterated its guidance for full-year gross margin of between 50% and 51%, which should translate to adjusted (non-GAAP) earnings per share of between $8.70 and $9.30. Previously, the company guided for 2019 earnings of between $8.30 and $9.30 per share. 

Finally -- with the caveat that it's still in its 2020 planning process and will offer more detailed guidance next quarter -- Boston Beer offered a preliminary look at 2020, calling for depletions and shipments growth in the "high teens to low twenties," with gross margin of between 49% and 51%. But to support future growth, Boston Beer also anticipates increasing its investments in advertising, promotions, and selling expenses to between $65 million and $75 million, up sharply from between $40 million and $50 million this year.

The bottom line

Perhaps that's the source of today's modest decline -- though it probably doesn't help that shares are still up nearly 60% year to date as investors celebrated the company's relative outperformance in spite of weakness at two of its key brands. Assuming Boston Beer can eventually return those brands to growth while maintaining the sources of its current strength -- which would effectively mean it's finally firing on all cylinders -- I suspect this drop could prove short-lived.