SAM – DEPLETING EXPECTATIONS

SAM is trading lower today on lower-than-expected FY11 earnings guidance.

 

On February 4th, we outlined our reasons for being cautious on the Boston Beer Company in 2011 in a post titled “SAM – HEADING FOR A HANGOVER.”  Specifically, we cited the potential for slowing top-line trends and rising costs.  Yesterday, SAM reported 4Q10 earnings of $0.87 per share, which fell short of the street’s $0.90 per share estimate.   Revenues came in light relative to consensus estimates with FY10 depletions up 11.5%, at the low end of management’s upwardly revised guidance range of +11-13% that was provided in December.  That being said, with depletions up 12% during the quarter, top-line trends continued to be solid and gross margins increased by more than 500 bps YOY.

 

Looking into 2011, the top-line comparisons will be difficult but the company guided to 9% depletion growth, which is slightly improved from its prior guidance of up mid-to-high single digits provided during its 3Q10 earnings release.  SAM maintained its FY11 gross margin guidance of 54-56% and stated, “From a cost perspective, I think we indicated the biggest cost exposure we have is energy, sort of linked to freight sort of outbound primarily, little bit of inbound.  I know there have been observations of cost increases on some of the agricultural materials that we use, but we were in actual [sic] good position when we made our arrangements for our 2011 purchases so we think we’re actually covered there in the guidance that we had given previously. So, that hasn’t really changed since we last gave that guidance. And on the other packaging material items, we haven’t seen too much movement and certain nothing that it would just put as noise at least to date.”

 

This current margin guidance continues to assume a 1% revenue per barrel increase which may not be easily passed on to consumers in light of the continuing tough economic environment and could put pressure on the company’s 9% depletion target.  Management alluded to the tough competitive environment in its comments yesterday, saying that it in 2011, “we expect to augment our sales force and brand support levels further to address the increasing competitive activity and to grow our brands appropriately given the opportunities we see. It is possible that these decisions might result in slower earnings growth in 2011, as we may forsake some earnings in the short term in order to build our organizational capabilities and support our brands at appropriate levels.” 

 

Specifically, the company is going to increase its investment in its brands by $12 to $18 million in 2011.  Although management had stated its intention to increase the level of investment behind its brands in 2011 prior to yesterday, they had not quantified the magnitude of the increase.  This is important because the company widened the range of its FY11 EPS guidance yesterday to $3.45 to $3.95 from its prior guidance of $3.95, which it provided in December.  Management stated that the new guidance reflects the negative impact of rolling out its new Freshest Beer Program, which it expects to reduce EPS by $0.20-$0.30 as it will cause core shipment growth to lag depletion growth during the year.  Although this was the only explanation provided by management, a $0.30 impact would imply a full-year earnings range of $3.65-$3.95, rather than the $3.45-$3.95 range provided.

 

Given that the full-year margin guidance did not change, which was surprising to me, management must think that shipments could actually lag depletions more than the initial 2%+ estimate as a result of the new Freshest Beer Program and is providing a cushion on the downside or the company increased its planned level of spending behind its brands in 2011 in order to defend its share position in what it expects will be an increasingly competitive market.  If the latter reason is correct, it puts the company’s 9% depletion target at risk, particularly when you combine that more competitive market with the company’s trying to pass on a 1% price increase.  Either way, shipment growth would be negatively impacted.

 

Howard Penney

Managing Director


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