Boston Beer (SAM +2.69%) is still dealing with a hard-seltzer hangover. The owner of the Truly franchise said in a recent earnings report that a sharp sales slowdown sparked over $100 million of write-offs connected to excess inventory and cancelled production plans. Distributors still have too much inventory on hand heading into the fiscal fourth quarter, too.
But the good news is that Boston Beer is still expecting to grow overall sales through the rest of 2021 and all of 2022. And earnings are likely to be lifted by major price increases on the way across its beer portfolio.
Image source: Getty Images.
The hard-seltzer hit
Investors were bracing for bad news about the Truly brand, which had been accounting for most of Boston Beer's growth in the past year. The hard-seltzer category was also responsible for most of the wider industry's growth.
The actual results were about as bad as expected. Sales gains slowed to 11% from 24% last quarter and over 50% in previous quarters. "The unexpected rapid slowdown of hard seltzer category growth this summer," CEO Dave Burwick said in a press release, "significantly impacted our business."
As a result, Boston Beer reported a loss after taking over $100 million of write-downs associated with destroying excess inventory and terminating a few contracts it had made with outside brewers to help with Truly production.
Price increases
On the other hand, management sounded optimistic about the potential of the hard-seltzer category following an industry shake-out through 2021. Truly is still in a premium position in the fastest-growing area of the alcoholic beverage industry, and it will be a strong platform to use in launching other products. "We are well positioned to succeed in 2022 and beyond," founder Jim Koch said, "as consumers look to drink more 'Beyond Beer' products."
That success will come partly from raising prices across its portfolio by 3% to 6% in 2022. Those hikes reflect rising costs on raw materials like aluminum and glass, but they're also designed to shore up its profitability now that the industry is maturing. Management had been prioritizing growth and market share, but now that focus is shifting toward achieving a stronger earnings profile.
To that end, Boston Beer is predicting its gross profit margin will rise in 2022 to between 45% and 48% of sales compared to the roughly 41% that management is expecting this year. This boost should allow earnings to stabilize after slumping in 2021.
Looking ahead
The company is also predicting sales growth in 2022, which implies that the Truly brand will settle down to a solid expansion rate after the company works through its current excess inventory. There are major risks to that outlook since consumer demand for hard seltzer is still in flux.
But for now, Boston Beer appears to be looking at stabilizing growth and profit trends in late 2021 followed by improving results through next year.
The broader growth profile depends on how well its next introductions are received by beer drinkers. But Boston Beer has a long track record for making the right calls on that score, notwithstanding the recent slump in the hard-seltzer niche.
