It's time for a toast, ladies and gentlemen, because Boston Beer Co. (NYSE:SAM) just drank Wall Street under the table, yet again.
Boston Beer announced that third-quarter revenue climbed 25% year over year, to $269.7 million, driven primarily by a 23% increase in core shipment volume, to 1.2 million barrels. That translated to earnings of $2.79 per diluted share -- a year-over-year increase of 47.6% -- helped by a combination of lower-than-expected employee benefit costs and the timing of certain advertising, promotional, and selling expenses. Analysts were only looking for earnings of $2.32 per share on sales of $258.6 million.
Driving depletion, lower capital spending
Boston Beer also achieved solid third-quarter depletions growth of 21%, bringing year-to-date depletions growth to 25%. Note this was an expected deceleration given more difficult comparables and a lack of new product launches in the back half of the year. It also allowed management to leave intact its guidance for full-year depletions growth of 20% to 24%.
Elaborating on the continued strength of this metric, Boston Beer founding chairman Jim Koch again praised the company's "effective sales execution, support from distributors and retailers, not to mention the quality of our beers, innovation and strong brands." Koch also noted Boston Beer enjoyed a smooth transition from Samuel Adams Summer Ale to its most popular fall seasonal, Samuel Adams OctoberFest. Other fall seasonals were also well received, including Samuel Adams Harvest Pumpkin, and an aptly named, small-batch double pumpkin ale called Fat Jack.
That's not to say those beers all needed to sell themselves. Though lower than expected, advertising, promo, and selling expenses increased by $8.9 million, or 16%, during the quarter, mostly in the form of investments to further bolster Boston Beer's core Samuel Adams, Twisted Tea, and Angry Orchard brands.
Next, Boston Beer significantly lowered its capital spending expectations for the full year to be in the range of $150 to $160 million. By comparison, three months ago, Boston Beer forecast capital spending to be in the range of $160 million to $185 million.
Nonetheless, some short-term investors will invariably be frustrated. Boston Beer once again left intact its full-year guidance for earnings per share in the range of $6.00 to $6.40. Boston Beer stated the third-quarter's benefit of lower operating costs will likely be offset by lower-than-planned volumes in the fourth quarter. By contrast, analysts were modeling fiscal 2014 earnings of $6.51 per share.
Think even longer term
There are a few reasons Boston Beer investors are being quick to forgive the company's refusal to raise 2014 earnings guidance. For one, Boston Beer CEO Martin Roper provided an encouraging update on its supply chain performance, saying it continued to improve in Q3, but "we still have plenty of room for further improvement."
Boston Beer has also now completed several previously outlined capital and efficiency programs, which have increased the company's capacity and capabilities. As a result, Boston Beer's capital expansion pace will slow in 2015 as it optimizes the investments it made during the past two years.
Roper explained that Boston Beer's "sales focus in 2015 will be on second year growth on some of our successful 2014 launches, rather than continue our recent high pace of new brand launches." That's great news for some investors who were previously annoyed by Boston Beer's stubborn insistence on continuously testing out dozens of unproven varieties of beers. At the same time, that insistence is part of what makes Boston Beer great, so you can be sure it won't stop tinkering with new brews entirely.
Finally, Boston Beer provided its expected first peek at some specifics for 2015. First, it calls for depletions and shipments growth of 10% and 15%, respectively. Boston Beer also sees national price increases of between 1% and 2% -- compared to this year's 2% increase -- and expects full-year 2015 gross margin to remain steady at between 51% and 53%. And speaking to Roper's comments above, Boston Beer's estimated full-year capital spending will fall to between $80 million and $100 million -- and that includes capital investments for Boston Beer's existing Alchemy and Science projects of between $5 million and $7 million.
All things considered, there isn't much not to like about Boston Beer's results today. The market apparently agrees, with shares currently up nearly 7% in Thursday's after-hours trading.