Boston Beer reported a loss of $4.76 per share in Q3 compared to consensus expectations of $4.51. Results included $7.73 per share of volume adjustment costs as the company recognized costs for overestimating hard seltzer demand. The $102.4M of direct costs accounted for inventory and obsolescence costs of $54.3M, contract termination costs for third party production of $35.4M, and equipment impairment costs of $12.7M. The company also recognized hard seltzer slowdown indirect costs of $30.6M. That was comprised of absorption costs of $11.4M, materials sourcing and warehousing costs of $11.8M, and out of code returns of $5.4M, plus $2M of other costs. This was hard seltzer's "kitchen sink" quarter.
Margins contract excluding the "kitchen sink." Depletions increased 11% in the quarter while shipment volumes increased 11.2%. Management believes distributor inventory levels of 6 weeks is appropriate for all of their brands except for Truly. Shipments for Truly will continue to be below depletions in Q4 in order to correct inventory levels. The hard seltzer manufacturers have been effective avoiding widespread discounting by destroying inventory. Gross margins contracted 290bps not including the volume adjustment costs. Promotional and selling expenses grew 54.4% due to increased marketing investments and higher freight costs.
Lowered Q4 outlook and a stake in the ground for hard setlzer's growth in 2022. Management’s revised outlook for 2021 EPS is $2 to $6 (including $7.73 of hard seltzer slowdown costs) compared to consensus of $17.24. Depletions and shipments are expected to increase 18 to 22%. Management’s preliminary outlook for 2022 is for depletions and shipments to grow between MSD% to LDD%. Management expects the hard seltzer category to be flat to up 10% in 2022 and for Truly to grow faster than the category. Pricing is expected to be between 3 to 6%. Gross margins are expected to be between 45 and 48% - in line with consensus expectations, but disappointing compared to 47% in 2020 that incurred significant inefficiencies.
Betting on beyond beer. Management continues to invest behind the future of “beyond beer.” We can’t argue with their success and strategy. Management is also confident in their ability to grow faster than the hard seltzer category in 2022. Given their resources and investments it seems likely that Truly will continue to gain share in 2022. Boston Beer has already announced new partnerships for "beyond beer" introductions with Suntory, Sauza and Mountain Dew. Retailers are already pulling back hard seltzer shelf space allocations in early 2022 discussions, with the smaller brands seeing most of the reductions. Brands outside of the top ten have such small collective share that it does not add anything meaningful for Truly.
We remain short. The most important unknown is the growth or decline of hard seltzer in 2022. While the hard seltzer category has grown some 14% YTD, accounting for much of the growth in the overall beer category in off-premise channels, it has been near flat in Q3. The category has three more quarters of difficult comparisons to anniversary making it difficult to project what growth will be going forward. As we have seen for the past several years, no one has been able to project with any accuracy what the growth rate for hard seltzer will be. While the hard seltzer brands have avoided promotions, they have continued to innovate. Like sharks needing to swim to breathe, the category has relied on innovation to grow. Truly has been leading on innovation, but the competition has not waved the white flag. What will occur when innovation slows down is another unknown. Boston Beer remains on our short list. We continue to see more risks to the downside for the hard seltzer category in 2022.
