Boston Beer Co. Inc. (NYSE:SAM) may have just exceeded its own expectations in the fourth quarter, but the market still put on its best bitter-beer face in Tuesday's after-hours trading. As of this writing, Boston Beer stock is down 8% following the craft brewer's latest quarterly report.
So what happened? I posed four questions for Boston Beer yesterday in an effort to better understand its results. Here's what the company said.
2014 guidance was cautious
First, considering analysts were modeling full-year 2014 earnings of $6.60 per share, I wondered whether Boston Beer was merited in its decision last quarter to reiterate 2014 guidance for earnings between $6.00 and $6.40 per share.
It wasn't. When all was said and done in 2014, Boston Beer's earnings increased by a much better-than-expected 29% year over year to $6.69 per share. However -- and keeping in mind Boston Beer didn't provide guidance for revenue -- 2014 sales climbed "just" 22% year over year to $903 million, or below Wall Street's expectations for full-year sales of $920.4 million.
Specifically in the fourth quarter, revenue climbed 6% year over year to $217.8 million, which resulted in net income of $19.1 million, or $1.40 per share. Analysts, on average, were looking for lower earnings of $1.37 per share on higher sales of $236 million. Boston Beer CEO Martin Roper explained the discrepancy by noting that in Q4, Boston Beer had lower sales and marketing spending and higher shipments than expected.
Depletions are still strong
Next, I wanted to know how Boston Beer's depletions -- an industry measure for how quickly its products travel from warehouses to consumer outlets -- fared in the fourth quarter.
As per usual, depletions showed continued improvement by rising 13% during the quarter. And yes, that's a marked deceleration in growth from 21% last quarter. But management already warned investors that would happen three months ago, citing harder year-over-year comparisons and few new product launches planned for the second half of 2014. Full-year 2014 depletions grew by 22%, or well within Boston Beer's guidance range of 20% to 24%.
I also wanted to know whether Boston Beer had any updates on its efforts to further improve its supply chain, which had previously suffered under increased demand and higher-than-expected freight costs. To that end, Roper merely reiterated that in 2015, Boston Beer's focus will be to "absorb and optimize our 2013 and 2014 investments." Those investments were aimed at both improving the freshness of its beers and enhancing customer service.
The Spring transition went well
Next, crucial to Boston Beer's consistent success are its planned seasonal transitions. In this case, that meant replacing its winter varieties with the new and existing spring offerings to supplement year-round staples such as Samuel Adams Boston Lager.
Boston Beer's founder and chairman, Jim Koch, stated, "At the end of the fourth quarter, we had a smooth transition to our spring seasonal Samuel Adams Cold Snap, which is in its second year." Koch also noted that in the current quarter, Boston Beer began a national rollout of two new IPAs: a session IPA named Samuel Adams Rebel Rider IPA, and a double IPA dubbed Rebel Rouser IPA. These two varieties should serve to complement Samuel Adams Rebel IPA, which Koch two quarters ago credited as helping Boston Beer achieve "the largest, most successful craft beer launch in history."
On 2015 guidance
Finally as promised, Boston Beer provided more specific forward guidance, calling for 2015 earnings per diluted share between $7.10 and $7.50. Analysts were modeling higher 2015 earnings of $7.96 per share.
Relatedly, Boston Beer still expects national price increases in 2015 of between 1% and 2%, with gross margin between 51% and 53%. However, Boston Beer also lowered its expected ranges for depletions and shipments in 2015, and it now expects the two metrics to grow between 8% and 12%, compared with between 10% and 15% previously.
Finally, Boston Beer also increased the top end of estimated 2015 capital spending by $10 million from guidance last quarter, resulting in a new expected range of $80 million to $110 million. A big chunk of that includes an increase in its planned expenditures for continued investments in the Alchemy and Science brands, to between $10 million and $15 million -- up from its previous range of $6 million to $12 million. That's not a big concern, however, as the stated mission of the A&S collaboration is to "increase awareness of craft brewed beers by exploring and managing a broad range of opportunities, from creating and-or incubating new breweries to providing legacy solutions to craft beer/brewery founders." A mouthful, for sure, but that mission is part of the core reason Boston Beer is thriving in the first place. Investors shouldn't mind watching the company allocate additional resources here.
In the end, the combination of Boston Beer's "light" revenue and disappointing guidance helps explain the market's knee-jerk reaction to the announcement. But we should also keep in mind Boston Beer's aforementioned habit of underpromising and overdelivering. All things considered, I think this was an impressive performance that shouldn't worry long-term investors and, quite the contrary, is worthy of celebration. Lucky for me, I happen to have a crisp, cold way to do so waiting in the fridge at home.