July 4th alcohol sales (STZ)
Off-premise alcohol sales improved from the recent trend over the holiday period. Total beverage alcohol sales grew 1.8% in the off-premise channel during the two weeks ended July 9, which includes the holiday weekend, according to NielsenIQ. Beer category sales grew 2.9% over the same period. Excluding FMBs and cider, the category grew 4.3%. Imported beer grew 10.9%. Spirits sales increased by 3.2% while wine decreased by 2.7%. RTD sales increased 3.4% with spirits-based RTDs growing 60.9%. Malt-based RTDs grew 47.8%, wine-based RTDs grew 47.6%, FMBs grew 19.7%, and hard seltzer decreased 15.7%.
For the four week period ended July 9, the beer category sales grew 2.5%, with volume down 1.7% in the off-premise channel. The RTD category grew 1.3% over the four week period led by spirits-based seltzers growing 73.2%, spirits-based cocktails growing 61.4%, hard tea growing 23.8%, wine cocktails growing 23.3%, and FMBs increasing 4.2%. Wine seltzers decreased by 46.5% and malt-based seltzers decreased by 10.1%. Craft beer decreased by 4.3%, and hard seltzer decreased by 15.9%. Imports have gained 150bps of share to 22.2% in the four week period, while craft beer lost 80bps and hard seltzer lost 220bps. YTD, craft beer’s share of the beer category has fallen 80bps to 11.8%, while hard seltzer has fallen 100bps to 9.1%. Constellation Brands continues to be the growth story in the beer category.
Hard seltzer weighs on Q2 results (SAM)
Boston Beer reported Q2 EPS of $4.31, falling short of consensus estimates of $4.47. Depletions decreased 7% mostly driven by Truly. Excluding Truly depletions increased 14%. Management believes hard seltzer has lost its novelty with more competition and inflationary concerns pushing consumers back towards light beer. Shipments decreased 1.1% with growth coming from Twisted Tea and Hard Mtn Dew. Truly sales fell 17% in the quarter. Twisted Tea remained the one bright spot for the company as it has been the fastest growing brand among the top 20 beer category brands. Sales in the off-premise channel for Twisted Tea accelerated from 21% YTD to +39% in the latest four weeks.
Gross margins contracted 260bps due to higher materials costs and higher returns and scrap, partially offset by price increases. Margin comparisons become much easier in the 2H as the company laps inventory write downs last year. Operating expenses decreased 0.6%.
Management lowered EPS guidance to $6-11 from $11-16. Depletion guidance was cut to +2 to +8% from +4 to +10% due to weaker trends for Truly as well as a slower launch of Hard Mtn Dew in certain states. Management’s expectations for the hard seltzer category was drastically revised from flat to up 10% to down 15 to 20%. Gross margin expectations were reduced from 45-48% to 43-45% due to lower volume expectations and supply chain impacts. Based on off-premise trends since the Q1 report, expectations have been below guidance since it was issued last quarter.
The unwind in demand for hard seltzer has been more dragged out than management expected as consumers try other new products or return to their former beverages. On the way up, Truly benefited from the explosion in demand for hard seltzer and share gains within as it ramped up production quicker than White Claw. On the way down, Truly is losing share within the category while the category is also losing share within beer and RTDs. We remain on the sidelines without any visibility into future hard seltzer or craft beer trends. Gross margin comparisons have set a low bar and guidance for the upcoming quarter looks much more realistic than it did last quarter. Going long for the investment thesis of anniversarying inventory write downs and not lowering guidance is not part of our investment process in quad 4.
Inflation and in-stock levels (KR)
According to 210 Analytics, 93% of all grocery shoppers express concern over food inflation. According to an IRI survey, 51% of shoppers are stocking up on certain items more than usual. Of that percentage, 18% are motivated by stock out concerns, and 26% are motivated by concerns prices will rise further. Price per unit across all foods and beverages in the IRI measured channels accelerated to 12.3% in the four weeks ended June 26, from 11.9% for Q2. Compared to the same period in 2019, prices for all foods and beverages were up 24.2%. In-stock levels are returning to normal levels in the past few weeks, as seen in the chart below.
Out-of-stocks were a key contributor limiting consumers' ability to price shop over the past two years. Even though in-stock levels are normalizing, consumers have not changed their behavior yet. Instead of supply chain challenges, inflation may be impacting consumer behavior. Most CPG management teams have said that elasticity has been below their historical models. This may begin to change as in-stock levels improve.
