Takeaway: Boston Beer withdrew its 2021 EPS guidance last night.

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"Play It Again $SAM" | Boston Beer Breakdown  - 9 9 2021 10 08 27 AM

The Boston Beer Company withdrew its guidance for 2021, which had been EPS between $18 and $22, last night. Guidance was lowered on the Q2 earnings report from $22-26.

The company cited slowing trends in the hard seltzer category which will cause it to write-off inventory, pay third-party manufacturers fees for ordering less product, and incur other fees that will be expensed this year.

Management seems intent to avoid widespread discounts on Truly in the marketplace. There will be a reckoning in the hard seltzer category with retailers having devoted increasing amounts of shelf space to the category in the past two years.

In numerous stores White Claw and Truly were just stacked on the floor for easy access and ease of restocking. It is easy to see how other hard seltzer products will have to be cleared or returned to distributors as demand in the category no longer keeps up with recent ordering trends.

Boston Beer wants to ensure that the customer does not see Truly cleared in a way that leaves a bad taste in consumers’ mouths.

After lowering guidance on the last call we kept SAM shares on our short list. We now expect EPS to be down for the next four quarters YOY, but comparisons will be easy a year from now when we anniversary inventory write downs. After the Q2 earnings report we wrote our thoughts in response to 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.

Our thoughts have not changed, but our 2H 2021 EPS estimates have.

Hard seltzer will not be a high growth category, so SAM shares do not deserve a premium multiple. $16-20 is a better range for run rate EPS and a 20x multiple still reflects a premium for “depressed EPS power.” We remain short.