Boston Beer Says It "Overestimated" Demand for Hard Seltzer

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Boston Beer Company

BOSTON — The Boston Beer Company, Inc. reported second quarter 2021 net revenue of $602.8 million, an increase of $150.7 million or 33.3%, from the same period last year. Net income for the second quarter was $59.2 million, a decrease of $0.9 million or 1.6% from the same period last year. Earnings per diluted share were $4.75, a decrease of $0.13 per diluted share, or 2.7% from the second quarter of 2020. This decrease was primarily due to increases in operating expenses, lower gross margins, and a higher tax rate, partially offset by increased revenue driven by shipment growth of 27.4%.

Net revenue for the 26-week period ended June 26, 2021, was $1.15 billion, an increase of $365.2 million, or 46.7%, from the comparable 26-week period in 2020. Earnings per diluted share for the 26-week period ended June 26, 2021, were $10.01, an increase of $3.64 per diluted share or 57.2% from the comparable 26-week period in 2020.

In the second quarter and the 26-week period ended June 26, 2021, the Company recorded a tax benefit of $0.03 per diluted share and $0.72 per diluted share, respectively, resulting from the Accounting Standard "Employee Share-Based Payment Accounting" ("ASU 2016-09").

Jim Koch, Chairman and Founder of the Company, commented that "During the second quarter we saw significant growth in the On-Premise channel and re-opened all our retail locations as most COVID-19 restrictions have been lifted. However, our 24% depletions growth for the second quarter decelerated from our first quarter growth of 48% and was below our expectations, as the hard seltzer category and overall beer industry were softer than we had anticipated. Hard seltzer category growth was negatively impacted by several developments: (1) slowing growth in household penetration as the market matures and there is less new trial, (2) a gradual transition of volume to the On-Premise channel as hard seltzer becomes a more regular option in that channel, (3) new hard seltzer brands at retail that resulted in a proliferation of choices and consumer confusion, and (4) a challenging comparative period of significant pantry loading related to On-Premise restrictions in the second quarter of 2020. We are encouraged that four of our five major brands grew in the second quarter and we continue to expand our market share.  In measured Off-Premise channels in the first half of this year, where our brand portfolio represents 4% of the total beer industry volume, we've delivered over 45% of the industry volume growth, the highest of all brewers. We are thankful to our outstanding coworkers, distributors and retailers for their continued focus and diligence to continue to operate and help grow our business and achieve our thirteenth consecutive quarter of double-digit volume growth. We will continue to invest behind all our brands, with a particular emphasis on fueling the momentum behind Truly and Twisted Tea. We recently announced plans to develop new innovative beverages with Beam Suntory that we are planning to launch in early 2022. We believe these new beverages will further demonstrate our ability to innovate and grow our business as drinker preferences evolve. We remain highly positive about the future growth of our brands and that our diversified brand portfolio continues to fuel double-digit growth." 

Dave Burwick, the Company's President and CEO stated, "Our depletions growth in the second quarter was a result of increases in our Truly Hard Seltzer, Twisted Tea, Samuel Adams and Dogfish Head brands that were only partially offset by decreases in our Angry Orchard brand. Twisted Tea continues to generate double-digit volume growth rates and is the fastest growing flavored malt beverage brand family in measured Off-Premise channels during the first half of this year. Early in 2021, we launched Truly Iced Tea Hard Seltzer and during the second quarter we launched Truly Punch Hard Seltzer. Similar to Truly Lemonade Hard Seltzer, these new products deliver against drinkers' interest in bolder flavor profiles and demonstrate Truly's distinctiveness and innovation leadership within the hard seltzer category. In measured Off-Premise channels, Truly Iced Tea is the number one innovation in the overall beer industry over the first half of this year and Truly Punch is the number two innovation over the past four weeks. The overall Truly brand growth rate improved to 2.7 times the hard seltzer category growth rate in the latest 13 weeks, resulting in a 4-point share gain and closing the share gap to the number one brand to single digits. We are excited about our new Truly advertising campaign "No One Is Just One Flavor" featuring Grammy award winner and pop icon Dua Lipa and showcasing Truly's superior variety of flavors and the colorful and adventurous nature of Truly drinkers. Based on the brand's innovation leadership, strong brand building and growing cultural relevance, we believe Truly is well positioned to continue to grow share."

Mr. Burwick continued, "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 remainder of the 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. At the same time, we have been experiencing out of stocks on certain of our can products, most significantly on our Twisted Tea brand family. We expect wholesaler inventories of Twisted Tea to remain tight for the rest of the summer. Our outlook for the hard seltzer category in the second half of 2021 is uncertain and we have planned our capacity and spending based upon several volume scenarios. We will continue to manage our capacity requirements through a combination of internal capacity increases and higher usage of third-party breweries. We continue to work hard on our comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mix changes, and allow us to scale up more efficiently. While we are in a very competitive business, we are confident in the continued growth of our current brand portfolio and innovations and we remain prepared to forsake short-term earnings as we invest to sustain long-term profitable growth."

COVID-19

As the COVID-19 pandemic slowly winds down, the Company's primary focus continues to be on operating its breweries and business safely and working hard to meet customer demand.  The Company is very proud of the passion, creativity and commitment to community that coworkers demonstrated during this pandemic.  The Company began seeing the impact of the COVID-19 pandemic on its business in early March 2020.  The direct financial impact of the pandemic primarily included significantly reduced keg demand from the On-Premise channel and higher labor and safety-related costs at the Company's breweries. In addition to these direct financial impacts, COVID-19 related safety measures resulted in a reduction of brewery productivity, with more volume shifted to third-party breweries, increasing production costs and negatively impacting gross margins.  In the first half of 2020, the Company recorded COVID-19 related pre-tax reductions in net revenue and increases in other costs that total $14.1 million, of which $10.0 million was recorded in the first quarter and $4.1 million was recorded in the second quarter.  The total amount consists of a $5.8 million reduction in net revenue for estimated keg returns from distributors and retailers and $8.3 million of other COVID-19 related direct costs, of which $5.6 million are recorded in cost of goods sold and $2.7 million are recorded in operating expenses.  In 2021 and going forward, the Company has chosen not to report COVID-19 related direct costs separately, as they are viewed to be a normal part of operations.

2nd Quarter 2021 Summary of Results

Depletions increased 24% from the comparable 13-week period in the prior year. Shipment volume was approximately 2.45 million barrels, a 27.4% increase from the comparable 13-week period in the prior year.

Shipment volume for the first half was significantly higher than depletions volume and resulted in higher distributor inventory as of June 26, 2021, when compared to June 27, 2020.  The Company believes distributor inventory as of June 26, 2021, averaged approximately 5 weeks on hand and was at an appropriate level for each of its brands, except for Twisted Tea, which has significantly lower than planned distributor inventory levels for certain styles and packages.

Gross margin of 45.7% decreased from the 46.4% margin realized in the comparable 13-week period in 2020, primarily as a result of higher processing and other costs due to increased production at third party breweries, partially offset by price increases and cost saving initiatives at Company-owned breweries.

Advertising, promotional and selling expenses increased $61.3 million from the comparable 13-week period in 2020, primarily due to increased brand investments of $41.2 million, mainly driven by higher media, production and local marketing costs and increased freight to distributors of $20.1 million that was primarily due to higher rates and volumes.

General and administrative expenses increased by $3.3 million from the second quarter of 2020, primarily due to increases in external services and salaries and benefits costs.

The Company's effective tax rate for the second quarter increased to 26.1% from 23.4% in the second quarter of 2020. The Company's effective tax rate for the second quarter, excluding the impact of ASU 2016-09, increased to 26.6% from 26.4% in the second quarter of 2020.

Year-to-Date 2021 Summary of Results

Depletions increased 33% from the comparable 26-week period in 2020, reflecting increases in the Company's Truly Hard Seltzer, Twisted Tea, Samuel Adams and Dogfish Head brands that were only partially offset by decreases in the Angry Orchard brand.

Shipment volume was approximately 4.7 million barrels, a 41.3% increase from the comparable 26-week period in 2020.

Gross margin at 45.8% increased slightly from the 45.7% margin realized in the comparable 26-week period in 2020, primarily due to price increases, cost saving initiatives at Company-owned breweries, and direct costs related to COVID-19 of $5.6 million in the second quarter of 2020 that were partially offset by higher processing and other costs due to increased production at third party breweries.

Advertising, promotional and selling expenses increased $104.3 million from the comparable 26-week period in 2020, primarily due to increased brand investments of $62.2 million, mainly driven by higher media, production and local marketing costs and increased freight to distributors of $42.0 million that was primarily due to higher rates and volumes.

General and administrative expenses increased by $8.2 million from the comparable 26-week period in 2020, primarily due to increases in salaries and benefits and external services costs.

Impairment of long-lived assets decreased $1.1 million from the first half of 2020, primarily due to lower write-downs of brewery equipment at company owned breweries.

The Company's effective tax rate for the 26-week period ended June 26, 2021, decreased to 20.4% from 21.4% in the comparable 26-week period in 2020.  This decrease was primarily due to a higher tax benefit from stock option activity recorded in accordance with ASU 2016-09.

The Company expects that its June 26, 2021, cash balance of $103.0 million, together with its future operating cash flows and the $150.0 million unused balance on its line of credit, will be sufficient to fund future cash requirements.

During the 26-week period ended June 26, 2021 and the period from June 27, 2021 through July 16, 2021, the Company did not repurchase any shares of its Class A Common Stock.  As of July 16, 2021, the Company had approximately $90.3 million remaining on the $931.0 million share buyback expenditure limit set by the Board of Directors.

Depletion Estimates

Year-to-date depletions through the 28-week period ended July 10, 2021, are estimated by the Company to have increased approximately 32% from the comparable period in 2020. 

Outlook

The Company currently projects full year 2021 earnings per diluted share to be between $18.00 and $22.00.  This projection excludes the impact of ASU 2016-09.  The Company's actual 2021 earnings per share could vary significantly from the current projection.  Underlying the Company's current 2021 projection are the following full-year estimates and targets:

  • Depletions and shipments percentage increase between 25% and 40%.
  • National price increases of between 1% and 3%.
  • Gross margin of between 45% and 47%.
  • Increased investments in advertising, promotional and selling expenses of between $80 million and $100 million, a decrease from the previously communicated range of between $130 million and $150 million. This does not include any changes in freight costs for the shipment of products to the Company's distributors.
  • Non-GAAP effective tax rate of approximately 26%, excluding the impact of ASU 2016-09. This effective tax rate also excludes any potential future changes to current federal income tax rates and regulations.
  • Estimated capital spending of between $180 million and $230 million, a decrease from the previously communicated range of between $250 million and $350 million.
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