Boston Beer reported decent first-quarter results, as strong depletion trends continued to drive top-line growth in excess of 20%, although demand generation investments weighed on profitability. Boston Beer’s leading Sam Adams brand has enough brand equity to warrant a narrow economic moat, in our view, and this leading brand will support strong volume growth over the near term.
Boston Beer has benefited from nearly two decades of the craft beer category gaining share of stomach, and the company will continue to gain share as craft beers grow in popularity and the Sam Adams brand remains at the forefront of the category. As a result, strong depletion trends will persist over the near term, but at over 30 times forward earnings, the market has priced in overly aggressive long-term growth assumptions.
Boston Beer’s depletion trends remained robust in the first quarter, as depletions increased 16% for the period. Management reiterated expectations of 10%-15% depletion growth in 2013 (in line with our expectations), and with depletion trends running at around 18% year to date, Boston Beer’s early results suggest that the firm is on track to achieve its targets.
Despite robust top-line growth, gross margins contracted by 500 basis points to 50% of sales. Some of the margin contraction (around 160 basis points) was due to increased promotional/incentive costs (which are deducted from revenue), while higher input costs also weighed on results. Investors continue to expect higher raw material, packaging, and freight costs to limit margin expansion, but some of the impact of the promotional spending is timing related.
2013 expectations are in the middle of management’s unchanged guidance for gross margins of 53%-55%,versus 54% in fiscal 2012, and the company’s leadership in this fast-growing category will allow it to take enough pricing to offset raw material inflation and drive gross margins back to 55% over the long term. Still, gross margin pressures, as well as elevated advertising spend (up 13%) and general and administrative costs (up 27%), lead to a 20% decline in operating profit.
The company expects to invest $18-$26 million in advertising, promotional, and selling expenses, as well as an incremental $2 million-$4 million in brand investments for brands developed by Alchemy & Science, but the company should be able to spread such costs over a larger revenue base as volumes tick up during seasonally stronger selling periods.
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