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. Going into earnings, bulls argued the consensus estimate was stale. However, a YOY decline in Q2 is more like a rock than a crouton. 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 apparently 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.” Management's recent previously communicated expectations for the hard seltzer category were so bullish from a team not known for exuberance that in Boston seeing Tom Brady win a Super Bowl in Florida is less shocking.
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 short list 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 very difficult to predict with the various headwinds and tailwinds, but what is certain is 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.
Our thoughts for the “buy on the dip” arguments:
- The previous debate was that slowing growth would re-accelerate against easy comparisons. We said the easy comparisons were not going to be enough. “Easier comparisons” misses the one-time benefit from the pandemic.
- Hard seltzer will gain on-premise. We agree to an extent – an extent smaller than the headwinds facing off-premise.
- Management contends there will be a shakeout of weaker hard seltzer players that will benefit the category winners. Coors Hard Seltzer being pulled recently supports that argument. That misses the small amount of share that all the small players collectively have. It also misses the importance innovation and trial have for the category. The hard seltzer shakeout will not accrete to Truly and White Claw. It will not restore Truly to blistering growth.
- The category might have slowed dramatically, but Truly is still gaining share. At this valuation it is more important that the category grows than gaining share in a rapidly decelerating or shrinking category.
- Management “kitchen sinked” the quarter and estimates will start going up again. The valuation still reflects upside. We are not focused on 2H estimates, we are focused on 2022. 2022 estimates are probably going to be going down for the rest of the year.
