Boston Beer Co. Inc. (SAM) reported first-quarter 2014 earnings per share of 62 cents that came below the Zacks Consensus Estimate of 71 cents. However, the company’s quarterly earnings reflected a substantial improvement from the year-ago quarter earnings of 11 cents per share.
Results for the quarter benefited from an increase in shipments, offset by higher advertising, promotional and selling expenses and the inclusion of 6 cents per share gain from federal income tax settlement that was recorded in the prior-year quarter.
Quarterly Discussion
Net revenue for the quarter rose 35% year over year to $183.8 million and came ahead of the Zacks Consensus Estimate of $171.0 million, primarily attributable to an increase of 32% in core shipment volume. Price increases during the quarter were approximately 2%.
Moreover, depletions improved by a solid 34% in the quarter gaining from strong depletions rate for the company’s Samuel Adams, Angry Orchard and Twisted Tea brands.
During the quarter, the strength in the Samuel Adams brand was due to the celebrations for Boston Beer’s 30th Anniversary, the rollout of Rebel IPA and strong sales of its Seasonal beers. Overall, the company’s brands gained from strong brand support, that came from increased media spend, expansion of sales force and other brand support investments.
The company’s gross profit increased approximately 33.5% year over year to $90.5 million. However, as a percentage of net revenue, it contracted 100 basis points (bps) to 49% impacted by the product mix, higher brewery processing costs and customer program and incentive costs, which did not fully offset the price increases in the quarter.
Advertising, promotional and selling expenses soared 41.2% to $61.3 million driven by higher investments in media advertising, point of sale and local marketing, increased costs for extra sales personnel and commissions, and augmented freight to distributors due to higher volumes.
General and administrative expenses grew 8.9% to $15.9 million primarily due to increases in salary and benefit costs and consulting expenses.
Operating income in the quarter came in at $13.4 million, up 38.1% from the year-ago quarter level of nearly $9.7 million. Operating margin expanded 20 bps to 7.3% due to improved sales.
Balance Sheet
Boston Beer, which competes with Diageo plc (DEO), ended the quarter with cash and cash equivalents of $28.0 million compared with $49.5 million as of Dec 28, 2013. Long-term debt and capital lease obligations excluding current maturities stood at $528.0 million while stockholders’ equity was $344.1 million as of Mar 29, 2014.
Fiscal 2014 Outlook
The company reiterated its fiscal 2014 earnings per share guidance in the range of $6.00 – $6.40. However, the company expects actual results to deviate from the targeted numbers.
Earnings projections for the year are based on depletion and shipment growth target in the range of 16% – 20%. Further, to offset the rise in ingredient, packaging and freight costs as well as increased investments in brands, it anticipates price increases of about 2%.
Gross margin is projected to range between 51% and 53%. Spending toward advertising, promotional and selling expenses are expected to be in the band of $34.0 to $42.0 million. Effective tax rate for the period is forecasted to be approximately 38%.
The company highlighted plans to incur investments for its existing brands developed by Alchemy & Science to the tune of $4 million – $7 million. These expenses form a part of the projected increases in advertising, promotional and selling expenses for the year.
Further, the company narrowed its estimated capital spending for the year to be in the range of $160 million – $200 million, compared to its previous forecast of $160 – $220 million. Moreover, the company stated that the investments related to Alchemy & Science projects are included in the capital spending forecast.
Currently, Boston Beer has a Zacks Rank #4 (Sell). Better-ranked stocks within the industry are Constellation Brands Inc. (STZ) and Molson Coors Brewing Company (TAP), both of which sport a Zacks Rank #2 (Buy).
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