Investors had some heady expectations for Boston Beer's (SAM -1.97%) ahead of its first-quarter report. While the beer brewer enjoyed a record 2020 thanks to booming demand for brands like hard seltzer Truly, competitive products seem to be entering the market with each passing week.

But Boston Beer showed in its latest earnings update that it can keep extending its lead in that crowded niche. And while that success might crimp its earnings in the short term, it should support solid returns for investors over time.

A man selecting beer bottles at a supermarket.

Image source: Getty Images.

Sales growth sped up

Depletions (the industry's metric for measuring sales to consumers) were up 48% at the start of 2021, a big acceleration from the prior quarter's 26% boost. That result kept Boston Beer firmly on top of the beer industry. For context, rival Constellation Brands recently announced a 6% depletion gain thanks to solid sales growth from its Modelo and Corona brands.

But Sam Adams' Truly franchise is in a class by itself. Its depletions more than doubled with help from the new iced tea flavored variety that quickly established itself as a top seller. Overall, the hard seltzer franchise gained about 7 percentage points of market share in Q1, management estimated. It now accounts for 40% of the booming niche's growth.

"We are happy with our strong start to the year and our record first quarter shipment and depletion volumes," CEO Dave Burwick said in a press release.

Costs are still high

Ironically, those surging sales hurt profitability, since Boston Beer is still operating above its own capacity to brew, package, and ship enough Truly products to meet consumer demand. Gross profit margin fell to 45.8% of sales from 46.8% a year ago, after adjusting for one-time COVID-19 related expenses. That decline was offset by slower advertising spending, though, which allowed pre-tax earnings to jump to $77 million from $21 million.

Yet the pressure on its profit margin isn't likely to end until sales growth settles back down. "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," Burwick said.

Looking ahead

Boston Beer is preparing for potentially epic summer-season demand for hard seltzer. That's a key factor behind its 60% increase in case shipments in Q1. Management is also optimistic that new introductions under the Sam Adams banner will help that franchise return to growth in 2021 as restaurants and bars begin welcoming back more customer traffic.

As a result, Burwick and his team now anticipate that depletions will rise by between 40% and 50% this year, up from their previous forecast of between 35% and 45% growth. Prices could rise by as much as 3%, on average, too, rather than the 2% previously predicted. These trends should combine to push earnings per share to between $22 and $26 in 2021, marking a nice upgrade from Boston Beer's prior outlook. In short, this growth stock seems set for another record year as its rivals scramble to slow the positive momentum that the Truly franchise keeps racking up.