I hope you're thirsty, Boston Beer Co. (SAM 1.31%) investors, because your favorite brewer just served up a delicious second quarter. Boston Beer's quarterly revenue rose 9% year over year, to $252.2 million. For that, Boston Beer primarily credits core shipment growth of 7%.
Net income rose 16%, to $29.9 million, or $2.18 per diluted share, helped by a combination of higher shipments, lower taxes, and improved gross margin of 54%. By comparison, analysts were expecting roughly the same revenue to result in significantly lower earnings of $1.92 per share.
So why are shares currently down 5% in after-hours trading? Look no further than Boston Beer Founder and Chairman Jim Koch, who cautioned, "Our total company depletion trends of 6% in the second quarter of 2015 have slowed in comparison to prior quarters due to some developing weakness in our Samuel Adams brand."
Deplete responsibly
On one hand, Boston Beer's 6% growth in depletions -- a key measure for how quickly its products travel from warehouses to consumer outlets -- were driven entirely by strength in its supplemental brands, including Angry Orchard, Twisted Tea, and Traveler. Recall that Traveler's national rollout is ongoing and began last quarter, supported by a national media campaign. In July, Boston Beer also began rolling out its new Coney Island Hard Root Beer, which is the latest product of its Alchemy & Science division's mid-2013 acquisition of the rights to the Coney Island craft beer brand.
"Both these rollouts are being well-supported by distributors, retailers and drinkers," added Boston Beer CEO Martin Roper. "We are pleased with Traveler's progress this year, but it is too early to tell how successful the Coney Island Hard Root Beer introduction will be."
On the other hand, some Samuel Adams varieties -- in particular its Boston Lager and seasonal selections -- suffered continued weakness in depletions in Q2, due to what Koch describes as a "very competitive category where drinkers are facing greatly increased choices and established brands are being affected."
As a result, Boston Beer decreased its full-year estimates for depletions growth to between 6% and 9%, down from its previous range for depletions growth of 8% to 12%. But don't think for a second that Boston Beer is going to take the challenge sitting down: In the second half of 2015, Boston Beer is hoping to combat this weakness by introducing new packaging and advertising, which should, in turn, support continued promotional investments.
In addition, Boston Beer is working on further honing its supply chain through better training, more effective scheduling, and ongoing improvements in operating efficiency and reliability. For example, Boston Beer is currently working on a test basis with one wholesale distributor on a "pure replenishment service model" within its Freshest Beer Program, which, if successful, would further reduce wholesaler inventories while also improving the freshness of its beers. As it stands, Boston Beer currently has around 69% of its volume in its Freshest Beer Program, and hopes to reach 75% of total volume in the program by the end of this year.
Once again, Roper reiterated his stance that, "We remain prepared to forsake the earnings that may be lost as a result of these investments in the short term, as we pursue long-term profitable growth."
Drinking forward
Nonetheless, Boston Beer is, once again, reiterating its 2015 guidance for earnings per diluted share of $7.10 to $7.50, the midpoint of which sits below analysts' expectations for 2015 earnings of $7.47 per share.
Also the same are assumptions for national price increases between 1% and 2%, gross margin between 51% and 53%, advertising and promotional investments between $25 million and $35 million, and $10 million to $15 million allocated to investments in emerging brands developed by the Alchemy & Science division. Meanwhile, picking up the slack for lower depletions are estimates for both a 37% effective tax rate -- down from an expectation of 38% last quarter -- and capital spending between $70 million and $100 million, representing a reduction of $10 million from the top and bottom ends of last quarter's guidance range.
In the end, it's hard to blame the market for spitting out shares given the weakness in Boston Beer's core Samuel Adams brand. But this was a solid quarter from Boston Beer. And while it's certainly preferable to see the company firing on all cylinders, investors can take solace knowing Boston Beer is not only working hard to address the problem through cost efficiency and effective marketing, but also through the continued outperformance of its emerging brands.
