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Editor's Note: Below is Hedgeye Consumables analyst Daniel Biolsi's post-earnings analysis on his short Boston Beer (SAM) research. Biolsi highlighted $SAM as a best idea short on 12/14/20. Following a massively disappointing earnings call today, SAM fell roughly -27% at the open. Below is updated analysis following the earnings call, as well as key takeaways on why Biolsi is short the stock. For more info on Consumables Pro research click here. |
FROM Biolsi Today
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.
