Boston Beer Earnings: Early Signs of Sales and Margin Bottoming Out, Ad Spending to Drive Growth

Narrow-moat Boston Beer SAM posted better-than-expected second-quarter results, with moderating sales decline and margin rebound that indicate product refreshment and supply chain cost saving measures are starting to bear fruit. A revenue decline of 2% (versus the 5% fall in the first quarter) and EPS expansion of 9% (versus a loss) both exceeded our estimates (for sales and EPS to fall by 4% and 8%, respectively). We see no need to change our 2023 preprint estimates that are in line with management guidance and expect the brewer to take a few more quarters to reposition its Truly portfolio amid ongoing hard seltzer industry consolidation. We are incrementally more constructive on the firm’s long-term outlook as a leader in the premium beyond beer category and believe our 10-year projection for mid-single-digit top-line growth and low-teens average operating margins remain achievable. We maintain our $497 fair value estimate and view shares as undervalued, trading at a 24% discount after a 20% pop on the earnings update.

We find the 3% price increase (at the high end of the 1%-3% guidance range for 2023) particularly encouraging, reaffirming our view that distributor demand for Twisted Tea (40% of volume) remained strong and the brewer’s decision to write off hard seltzer inventories instead of discounting helped preserve pricing. We see double-digit volume expansion for Twisted Tea in the next several quarters, thanks to retailer shelf space gain and higher penetration beyond the East Coast. Meanwhile, new flavors and refreshed packaging for the Truly portfolio, in addition to sharper digital and social media marketing, should also help stabilize volume trends. We view favorably management’s decision to raise 2023 ad spending by 10% from 2022 levels (versus a 2% growth in the prior plan), which should enhance brand intangibles and bolster consumer connection, and expect the firm to fund the additional $15 million spending with cost savings in the supply chain.