Boston Beer's (NYSE:SAM) fourth-quarter earnings results, due out on Tuesday, Feb. 24, should answer a few big questions that investors have about the health of its business. On one hand, the craft beer giant had a fantastic start to the year: Sales jumped 25% higher through the first nine months of 2014.
However, competition from both large and small brewers is starting to eat into its market share, and sales growth will likely take a turn lower in 2015. Those trends could be why the stock is off of its all-time high heading into the fourth-quarter earnings announcement.
Will Boston Beer prove skeptics wrong by beating expectations again? Let's look at the key areas for investors to watch for in the release.
How low will beer shipments go?
Analysts who follow the company are bracing for a big growth slowdown in the fourth quarter. Wall Street sees sales improving by just 15%, to $235 million. By comparison, Boston Beer logged gains of better than 25% in each of the first three quarters of the year.
The expected fourth-quarter dip isn't exactly a reflection of soft demand, though. Boston Beer is up against a quarterly comparison that was artificially boosted by retailers restocking their low inventories in the prior year. That situation isn't repeating, and so beer volume will likely seem weak on a year-over-year basis.
Investors should instead focus on full-year results to get a clearer picture of the health of the business. Look for Boston Beer to book annual depletions growth of around 22%, which is on par with 2013's gain, and solidly above management's initial 18% projection issued a year ago. Depletions growth refers to the rate at which beer already shipped from a producer to a distributor leaves the distributor's warehouse on its way to its final customers.
Are profit expectations too high?
Meanwhile, Wall Street may be setting itself up for an unhappy surprise on profits next week. Analysts see Boston Beer earning $1.37 per share in the fourth quarter to bring full-year profit to $6.66 per share. That's a much more aggressive target than management has laid out: Executives said in October that they see 2014 profit of $6.20 per share at the midpoint of guidance.
There are a lot of moving pieces in that earnings target, including higher advertising expenses and lower transportation costs. But keep your eye on price increases and gross margin. Prices should tick higher by 2%, while profit margin stays close to management's goal of 52%. Unless those numbers fall, you can be confident that stepped-up competition isn't forcing management to slash prices to protect market share.
What's the long-term outlook?
But the star of next week's earnings announcement could be management's forecast for 2015. In October they issued an initial projection that called for depletions growth as low as 10%, or less than half the pace Boston Beer set in each of the last two years.
The company won't have major new product introductions to boost results like the Rebel IPA or Cold Snap brands did in 2014. But that launch break shouldn't worry long-term investors. After all, the company started tinkering with fermented apples in 1995. It took almost 20 years before those experiments yielded the powerhouse Angry Orchard franchise. That just shows how unreasonable it is to expect a new major product rollout each year.
But here's the bigger picture: Craft beer still accounts for less than 10% of the overall market. That percentage is sure to grow over time. And Boston Beer's challenge is to fight off large- and small-scale brewers to keep grabbing a big portion of those gains.
Demitrios Kalogeropoulos owns shares of Boston Beer and made his tiny contribution to the company's huge sales growth this year. The Motley Fool recommends Boston Beer. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.