Boston Beer (NYSE:SAM) delivered a first-quarter report that was nearly a carbon copy of its fourth-quarter from 2013. Revenue and volumes again grew at impressive rates. Earnings again fell short. And company executives made no bones about their plans to sacrifice short-term profits and margins as they seek to put the brewer in an even stronger position moving forward.
Before we go further, let's take a quick look at the quarterly results:
- Revenue came in at $183.8 million, up 35%, year over year.
- Depletions, which gauge how fast beer moves from distributors to stores, bars, and restaurants, were up by 35%.
- Volumes were up by 32%, year over year, to 835,000 barrels for the quarter.
- Earnings per share were up $0.11, to $0.52 for the quarter.
- Gross margin was down by one percentage point, from 50% to 49%.
On the revenue front, Boston Beer came in ahead of the consensus $176 million analysts were expecting. The earnings front was a different story. Analysts were expecting $0.66 per share.
The weaker-than-expected earnings number might put a dent in Boston Beer shares, but it should not have come as a surprise to investors who have been following the company closely. Simply put, the bottom line is hurting because the top line has grown faster than Boston Beer was prepared for.
Outpacing craft competitors
The U.S. craft beer market grew by 20% in 2013, according to the Brewers Association. So the 34% and 35% figures Boston Beer has hung up in the past two quarters is truly impressive, especially when you consider that Boston Beer is already three times the size as the next-largest craft brewer, Sierra Nevada. It's growing far faster than competitor Craft Brew Alliance (NASDAQ:BREW), which posted just 6% sales growth in 2013, despite high hopes for a true breakout year for the West Coast brewer. Craft Brew has big plans for its Kona and Redhook labels in 2014 -- as well as the stabilization of its Widmer Brothers label -- but it has a lot of ground to make up, with Boston Beer firing on all cylinders, and megabrewers Anheuser-Busch Inbev and Molson Coors pushing further into the craft space.
Boston Beer's new West Coast-style Rebel IPA has sold well in its nationwide rollout, company executives say. It's already one of the top three best-selling IPAs in America. The Angry Orchard cider line, already the most popular in the U.S., "had an unbelievable 12 months," CEO Martin Roper told analysts Wednesday. What's more, the company's flagship Boston Lager, now 30 years old, has continued to grow, company executives say.
All this, plus the continuing solid performance from Boston Beer's seasonal offerings, has left the company in a tough, but enviable, spot. To keep up with current demand, it needed to invest in its breweries. To keep this momentum going, it needed to invest in its sales force and in marketing its beers, ciders, and teas while interest is on the upswing. It's best to strike while the iron is hot.
Making investments now
On that point, Boston Beer's management has been adamant about the company's strategy. It plans to spend now, a time when it believes its investments will deliver big returns for years to come. Here's CEO Martin Roper in Wednesday's conference call:
Given the opportunities that we see, we expect a continued high level of brand investment and capital investment as we pursue growth and innovation. We are prepared to forsake the earnings that maybe lost as a result of these investments in the short term, as we pursue long-term profitable growth.
So, forsaking earnings remains Boston Beer's plan. Roper did say that the company could consider making efficiency a higher priority, but he quickly noted how hard that is to do at a time when it needs to increase the amount of beer it can produce to meet the existing demand, while also investing to increase that demand moving forward.
The Foolish bottom line
Boston Beer again fell short on earnings estimates while posting impressive revenue growth. This may hurt the share price in the short term, but investors with a long time horizon should welcome the moves that the brewer is making. These investments should continue to pay off for many years to come.