Shares of Boston Beer Co. Inc. (SAM) gained 3.2% during yesterday’s trading session after the company posted strong financial results for the second quarter of 2014. The largest craft brewer of the United States posted earnings of $1.88 per share for the quarter that surged 29.7% year over year, and also came well ahead of the Zacks Consensus Estimate of $1.73. Results for the quarter mainly benefited from robust increase in shipments, partially offset by higher advertising, promotional and selling expenses.
Quarterly Discussion
Net revenue soared 28% year over year to $231.6 million and came ahead of the Zacks Consensus Estimate of $220 million, primarily attributable to an increase of 25% in core shipment volume. Moreover, depletions improved by a solid 23% in the quarter gaining from strong depletions rate for the company’s Samuel Adams, Angry Orchard and Twisted Tea brands.
The company believes that robust depletion in the quarter was mainly led by increased media spend, expansion of sales force and other brand support investments. Looking at the recent depletion trends, Boston Beer has raised its 2014 depletion forecast to 20%–24% from the earlier projection of 16%–20%.
The company’s gross profit increased approximately 26.7% year over year to $123.1 million. However, as a percentage of net revenue, it contracted 50 basis points (bps) to 53.1% as the benefit of rise in price was slightly offset by a negative impact from product mix, and higher packaging and ingredient costs.
Advertising, promotional and selling expenses soared nearly 31.4% to $65.9 million because of 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 11.9% to $16.7 million, primarily due to increase in salary and benefit costs.
Operating income in the quarter came in at $40.5 million, up 26.4% from the year-ago quarter level of $32 million. However, operating margin contracted 20 bps to 17.5% due to reduced gross margin partially offset by lower operating expenses as a percentage of sales.
Balance Sheet
Boston Beer ended the quarter with cash and cash equivalents of $31.3 million. Long-term debt and capital lease obligations excluding current maturities stood at $528 million while stockholders’ equity was $371.7 million. Further, during the first half of 2014, the company generated approximately $38.3 million of cash from operating activities while it deployed nearly $88.5 million toward capital expenditure.
Fiscal 2014 Guidance
Despite posting a solid second quarter result, the company maintained its earlier fiscal 2014 earnings per share guidance of $6.00–$6.40. However, the company expects actual results to deviate from the targeted numbers.
Further, to offset the rise in ingredient, packaging and freight costs as well as increased investments in brands, it anticipates price increase of about 2%. Moreover, gross margin is still projected to range between 51% and 53%.
However, amount to be spent toward advertising, promotion and selling expenses has been raised to $37–$45 million from the previous guidance range of $34–$42 million. Effective tax rate for the period is still projected to be approximately 38%.
The company highlighted plans to incur investments for its existing brands developed by Alchemy & Science in the band of $3–$5 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 and now expects it to be in the range of $160–$185 million, compared with its previous forecast of $160–$200 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 #1 (Strong Buy). Other stocks worth considering in the industry are Constellation Brands Inc. (STZ), Anheuser-Busch InBev SA/NV (BUD) which is also known as AB InBev and Brown-Forman Corp. (BF.B), all of which carry a Zacks Rank #2 (Buy).
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