The hard seltzer reset (SAM)
Boston Beer widely missed the Q2 Factset EPS consensus of $6.60, which was above $7 not too long ago, by reporting $4.75. EPS decreased 2.7% YOY after growing 250%+ in Q1. The shortfall was across the board - lower revenue, lower gross margins, higher operating expenses, and a higher tax rate. Revenue increased 33.3% but decelerated from 64.9% in Q1. The margin shortfall was due to a sudden drop in hard seltzer demand when management was seemingly planning for as much growth as possible. Depletions increased 24%, decelerating from 48% growth in Q1, while shipment volumes increased 27.4%. Management said, “We overestimated the growth of the hard seltzer category in the second quarter and the demand for Truly, which negatively impacted our volume and earnings for the quarter and our estimates for the full year. We increased our production of Truly to meet our summer peak and have had lower than anticipated demand for certain Truly brand styles, which has resulted in higher than planned inventory levels at our breweries and increased supply chain costs and complexity.”
Gross margins contracted 70bps due to higher processing costs and third-party production. Advertising, promotional, and selling expenses grew 61.1%, accelerating from 44% growth in Q1. Freight costs were $20.1M higher due to higher rates and volumes. Management lowered EPS guidance to $18 - $22 from $22 - $26 and consensus of $24.42. Depletions and shipments are now expected to be up 25-40% from 40-50%. Advertising costs will be lowered from a previously budgeted $130-150M increase to an $80-100M increase. Capex plans were lowered from $250-300M to $180-230M.
Boston Beer remains on our shortlist due to several concerns which did not change at all. Slowing to no growth in household penetration, increased competition from RTDs, reliance on innovation for growth, and the shift back to on-premise from off-premise. Demand is challenging to predict with the various headwinds and tailwinds, but certain growth is slowing for the hard seltzer category. Shares still look expensive at 38x current year guidance based on after-hours trading. Slowing growth stocks are difficult to time; we advise patience. Please see our separate note for additional details.
Wine shipments maintain strength (VWE)
According to the latest Wine Analytics Report, the total value of the U.S. wine market grew 3% in the past year to $71.8B. The on-premise channel has improved dramatically in recent months, removing some consumption occasions for the off-premise channel. Bw166 reported on-premise wine sales grew 189% in June. CGA Strategy reported that on-premise wine sales grew 597% in June. According to CGA, wine sales for the 12 months ended May 22 were down 48% from the prior year to nearly $8B. Nielsen reported off-premise wine sales fell 9% to $902M in the four weeks ended June 19, while volume fell 13% to 9.1 million cases.
Total winery direct-to-consumer shipments increased 18% in June to $223M, as seen in the chart below. Volumes increased 4% to more than 573,000 cases. Sonoma County’s wine shipments increased more than 25% in the 12 months ended June to $884M (2.8 million cases). Napa County’s shipment volumes grew 6% to 2.1 million cases and a total shipment value of $1.7B.
Its mix of sales differentiates vintage Wine Estate. Roughly one-third of its sales comes from each of the wholesale, DTC, and B2B channels. The DTC channel saw a strong increase in sales during the pandemic as consumers joined wine clubs and purchased directly from the wineries, helping to offset the on-premise decline. Maintaining that direct connection with consumers and growing the wine clubs will be a strategic tailwind.
Craft beer declines (SAM)
Off-premise craft sales are down 5% YTD through July 10, according to Bump Williams. Q1 sales were up 7.5%, while Q2 sales declined 13.5%. Craft beer sales were $2.9B through July 10, ranking the category third behind domestic premium and imports. The overall beer category sales were only down 1.6% YTD in comparison. Between weeks 21 and 27 this year, “all other” craft beer brands outside the large and import brands comprised 56% of draft share, according to Fintech InfoSource. That represented a 16% point increase compared to the first 20 weeks of the year when “all other” brands had 40% of draft share. The biggest declines were seen at the largest craft brands, which have declined 11% in off-premise sales. Regional craft brands decreased 5.7%, local craft brands decreased 4.5%, and national craft brands decreased 1.8%. Hazy IPAs with a 7.8% share gained 1.5% points, the largest share gainer and ranking as the top growth category. Hazy IPA off-premise sales grew 17.4% to $230.1 M while total IPA off-premise sales decreased 7.4% to $775.2M. The IPA category has 26.3% of craft sales, the most of any craft style, but lost 0.7% points. Cans now have 57.9% of the dollar share of craft beer compared to 42% for bottles after cans grew 5% this year, and bottles decreased 16%. Sales of six-pack cans now outsell six-pack bottles (25.7% vs. 24.5%).
