The beer business went into growth mode during the pandemic for some companies, but that's come to a screeching halt in 2022. Boston Beer (SAM 0.49%) is expecting volume to decline by a big margin this year, and profits are going to be well below what even management previously expected.
Many culprits could be blamed for the bad quarter, but Truly is taking the brunt of the criticism. After going all-in on the seltzer market with Truly, Boston Beer is seeing more competition and less demand in the market for seltzer products. That's why the second quarter of 2022 was a Truly terrible quarter.
Depletions, which measure the amount of product that was delivered to customers, fell 7% from a year ago, and shipments fell 1.1% in the second quarter. That led to a 2.2% drop in revenue to $616.2 million, and ultimately a 10% drop in net income to $53.3 million, or $4.31 per share.
Management blamed the Truly line of hard seltzer for the weak performance, and we may be seeing a broad shift in both competition and the demand customers have for seltzer alcoholic beverages.
The big concern
I think it's reasonable to overlook any single bad quarter, but this is where guidance becomes a big problem. Management expects depletions to fall between 2% and 8% for the full year, which is a massive drop from previous guidance of 4% to 10% growth. Again, management blamed Truly, and also a delay in the launch of Hard Mountain Dew.
There's some pricing power with guidance of 3% to 5% price increases this year. But that's not enough to cover rising costs, and as a result, gross margins are expected to be 43% to 45%, versus prior guidance of 45% to 48%.
It seems that the shift to fewer seltzers and less demand overall took management off guard, and that's leading to a huge drop in demand and the drop in the stock we've seen after earnings.
Where Boston Beer goes from here
2022 may be more of a transition year for Boston Beer than many people anticipated. It appears, based on the chart above, that the pandemic resulted in some tailwinds in demand that aren't continuing as most of the world returns to "normal." This could be because Boston Beer has less of a presence in bars and restaurants, or because demand is shifting away from seltzers. Or maybe people are drinking less this year.
There's clearly a shift taking place in the alcoholic beverage industry, and it seems to be away from Boston Beer's products. Long-term, this is a company that has proven its ability to adapt to new market conditions, but this year may be a tough year for investors until it gets the strategy right.