Boston Beer Co. had warned lower hard seltzer volume would hurt its third-quarter earnings, and boy did it. The producer of Samuel Adams Boston Lager, Truly Hard Seltzer and other brands reported a loss of $58.4 million, a decrease of $139.2 million from the prior year.
But there was plenty of good news in Boston Beer’s third-quarter report, too:
- Third quarter depletions increased 11% and third quarter shipments increased 11.2% compared to the prior year.
- Third quarter net revenue of $561.6 million increased 14.0% compared to the prior year.
- Year-to-date depletions increased 24% and year-to-date shipments increased 29.7% compared to the prior year.
- Year-to-date net revenue of $1.710 billion increased 34.0% compared to the prior year.
Despite the third-quarter earnings hit, Boston Beer’s net income totaled $66.3 million, or $5.33 a share, down $92.8 million from the prior year.
“The unexpected rapid slowdown of hard seltzer category growth this summer significantly impacted our business,” said Dave Burwick, President and CEO. “While Truly has continued to grow, gain share and solidify its long-term position, the slower category performance has reduced our full-year growth expectations for Truly to be between 20-25% year-over-year. In addition, the capacity and inventory we had built to take advantage of a higher-growth environment resulted in significant temporary costs this quarter.”
“Despite the slowdown in category growth, we expect hard seltzers, which represent 11% of total beer dollars year to date, up from 9% during the same period in 2020, will remain a very important segment of the beer market in the future. We’ve been playing to win and have reaped many benefits over the past 18 months. So far this year, Truly has generated 54% of all hard seltzer category growth. In addition, Truly has achieved the second-highest household penetration in all of beer behind only Bud Light beer and ahead of all its other hard seltzer and beer industry competitors. ”
“We have a tremendous track record of growth at Boston Beer, which is rooted in our heritage of delivering premium products that consumers love, and constantly innovating to meet ever-evolving tastes,” said Chairman/Founder Jim Koch. “Not only have we delivered a 12% compound annual growth rate in revenue for the last 20 years, we now own leading brands in a number of categories, and where we are not yet No. 1, our brands are gaining share. With our balanced portfolio of strong brands and a pipeline of innovative products preparing to come to market, we are well positioned to succeed in 2022 and beyond as consumers look to drink more ‘Beyond Beer’ products.”
“We believe we have the best brewers, the best high-end brands – with potential yet to be fully tapped – as well as the best sales force and the best innovation again for 2022,” added Koch. “We are fixing our capacity and supply chain issues, our marketing is hitting its stride, and we have the best distributor network behind us. We have a company and culture that not only delivers double-digit growth over extended horizons, but also demonstrates resilience and agility when faced with challenges. We will continue to work hard to prove our ability to outgrow the beer category for many years to come.”
The third quarter results include direct costs resulting from slower hard seltzer category growth of $102.4 million, before the related tax benefit. These costs include inventory obsolescence, destruction costs and other inventory related costs of $54.3 million, contract termination costs, primarily for excess third-party contract production, of $35.4 million and equipment impairments of $12.7 million.
The total direct costs of $102.4 million have been recorded in the third quarter financial statements as a $54.3 million increase in cost of goods sold, $12.7 million in impairments of long-lived assets and $35.4 million in contract termination fees.
In addition, the third quarter results include indirect costs resulting from the slowdown of hard seltzer category growth of $30.6 million, before the related tax benefit. These costs include unfavorable absorption impacts at Company-owned breweries and downtime charges at third party breweries of $11.4 million, increased materials sourcing and warehousing costs of $11.8 million and customer return provisions for out of code or damaged products of $5.4 million and other costs of $2.0 million.
These total indirect costs of $30.6 million have been recorded in the third quarter financial statements as a $6.9 million reduction in net revenue and a $23.7 million increase in cost of goods sold.
Depletions for the quarter increased 11% from the prior year, reflecting increases in the Company’s Twisted Tea, Truly Hard Seltzer, Samuel Adams and Dogfish Head brands, partially offset by decreases in its Angry Orchard brand.
Shipment volume for the quarter was approximately 2.3 million barrels, a 11.2% increase from the prior year, reflecting increases in the Company’s Twisted Tea, Samuel Adams and Angry Orchard brands, partially offset by decreases in its Truly Hard Seltzer and Dogfish Head brands.
The Company believes distributor inventory as of September 25, 2021 averaged approximately 6 weeks on hand and was at an appropriate level for each of its brands, except for Truly, which had significantly higher than planned distributor inventory levels for certain styles and packages. To address the slowing demand and continued uncertainty on future volume projections for Truly, the Company is working closely with its distributors to reduce Truly distributor inventory levels. The Company adjusted production and shipments during the third quarter and expects to continue to do so during the remainder of the year.
Gross margin of 30.7% decreased from the 48.8% margin realized in the third quarter of 2020, primarily due to $84.9 million direct and indirect volume adjustment costs, as a result of the hard seltzer slowdown described above, and higher materials costs, partially offset by price increases.
Year-to-date depletions through the 42-week period ended October 16, 2021 are estimated by the Company to have increased approximately 23% from the comparable period in 2020.
Looking to the future, Boston Beer projected full-year depletions and shipments will increase 18% to 11%. National price increases between 2% and 3%.
Looking toward 2022, Boston Beer said it expects:
- Depletions and shipments percentage increase of between mid-single digits and low double-digits.
- National price increases of between 3% and 6%. Gross margin of between 45% and 48%.
- Increased investments in advertising, promotional and selling expenses of between $10 million and $30 million. This does not include any changes in freight costs for the shipment of products to the Company’s distributors.
Zacks Equity Research noted Boston Beer’s $2.97 per-share earnings missed its consensus estimate of $4.04 a share.
