Boston Beer (NYSE:SAM) missed analysts' earnings estimates by a wide margin in the first quarter as the fallout from the coronavirus pandemic upended the alcoholic beverages market.

Restaurants, bars, and cafes have closed to enforce social-distancing measures and contain the spread of COVID-19. As a result, consumer demand for beer shifted to off-premise retailers like packaged goods stores and supermarkets. 

That resulted in production at Boston Beer's breweries shifting from kegs, which are typically used by on-premise establishments, to cans and bottles. But because most of the brewer's carryout products are produced by third-party contract brewers, it ended up raising the company's expenses, leading to the earnings miss.

Tray of Truly hard seltzer glasses

Image source: Boston Beer.

Shipments and depletions surge

Demand for alcoholic beverages hasn't really let up. Arguably, similar to cigarettes, it even intensifies during times of economic stress.

That's why revenue at Boston Beer surged 31% from the year-ago period to $330.6 million, due primarily to a 32% increase in shipments. Even excluding the shipments that were brought in by the acquisition of Dogfish Head Brewing last summer, they rose over 27% year over year.

Similarly, depletions jumped 30% excluding Dogfish Head. Depletions are sales to distributors and retailers and are considered an industry proxy for consumer demand. They were higher because of the continued, outsized demand for Boston Beer's Truly brand of hard seltzer and its Twisted Tea brand of hard tea. Beer, however, continues to be a disappointment.

Beer is still flat

There had been some hope that Boston Beer's flagship Samuel Adams beer would record its first quarter of depletions growth in five years.

Data from IRI showed that sales of Samuel Adams Boston Lager surged 22.3% for the four-week period ending March 22, which helped push year-to-date sales 2.3% higher. The caveat was that the figures were just for off-premise sales. And as it turns out, they could not overcome the deficit created by the lack of sales at restaurants and bars, which account for 30% of the business. It also only measured dollar sales, not volume sales, so price increases would have an impact.

Sam Adams is now into its sixth year of decline, and Boston Beer's Angry Orchard hard cider looks like it's returning to a secular decline once again as it notched its fifth consecutive quarter of lower depletions.

But with demand for Truly hard seltzer still rising, investors aren't very concerned.

Seltzer is still sparkling

While shares of the brewer initially fell on the earnings miss, they have since marched higher, and the stock is up 3% post-earnings, because there's good reason to believe Truly seltzer will continue to outperform.

Surveys by Nielsen found that Mark Anthony Brands' White Claw seltzer, the category leader, saw sales for the four-week period ended March 22 catapulting 363% higher. Truly jumped 226% in the same period. The Nielsen figures suggest that growth in the hard seltzer category is accelerating, because those gains are well ahead of year-to-date sales numbers showing increases of 330% and 207%, respectively.

During Boston Beer's conference call with analysts, CEO David Burwick said growth was indeed accelerating, and Truly continued to perform well above expectations. Now that it has introduced a Truly brand of hard lemonade, it is seeing similar growth patterns. "Since early January, Truly has accelerated its velocity and has maintained its market share, while other national hard seltzer brands have ceded share," Burwick said.

Costs will remain elevated

The market for hard seltzer has gotten crowded with the quarter seeing Anheuser-Busch InBev, Molson Coors, and Constellation Brands all preparing to launch new brands or brand extensions.

Yet the growth of the market also puts pressure on Boston Beer's profits, because its production capacity is primarily in kegs or bottles, and as chairman Jim Koch noted on the call, all of the growth it is seeing is in cans. That means it must continue to rely upon its contract brewers for Truly, which raises its costs.

Net income in the first quarter was $18.2 million, or $1.49 per share, down from $23.7 million, or $2.02 per share, a year ago. Relying upon outside breweries continues to hurt Boston Beer's gross margin, which narrowed year over year from 46.5% to 42.0%.

Best positioned for growth

Investors, though, don't seem to mind the shift in Boston Beer's business from beer to seltzer, even if it pinches profits. 

The company continues to enjoy strong sales and depletions growth, and though its on-premise business has been wrecked by the pandemic, the transition in consumer preferences to seltzer actually benefits the brewer's current setup, and it should not see much disruption overall.