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The seltzer boom has fizzled out, and Boston Beer Co. is paying for it.
Boston Beer
SAM,
which is known for Sam Adams beer but has made a big push into the hard-seltzer category with its Truly brand, reported disappointing earnings due to a decline in popularity of the drink yet again. Even after executives admitted three months ago that they overestimated the potential for the fizzy alcoholic drinks and warned that the decline was steepening last month, Boston Beer recorded a one-time loss of more than $100 million related to the downturn, sending its quarterly results and stock into the tank Thursday afternoon.
The emergence of White Claw, a carbonated fruity seltzer with alcohol, in the summer of 2018 led large alcohol companies like Boston Beer, Molson Coors Beverage Co.
TAP,
and Anheuser-Busch InBev SA
BUD,
to jump on the hard-seltzer bandwagon in a big way. While the category continued to grow for nearly three years, a sudden drop in growth popped up at the beginning of last summer, and has quickly steepened.
According to MKM Partners analyst Bill Kirk, September sales reached a new nadir, as distributors actually ordered less hard seltzer than they had in the same period the year before, the first such decline in the Beer Purchasers’ Index data since January 2018. He noted that overall beer orders were strong, with premium light beer outperforming seltzer, and that the gap between overall beer orders and seltzer orders was the widest the industry had seen since 2016.
That dynamic showed up again in Boston Beer’s quarterly earnings report. The company reported a third-quarter loss of $58.4 million, or $4.76 a share, down from earnings of $6.51 a share a year ago, on sales of $561.6 million, which was higher than last year’s $493 million. Analysts on average were expecting earnings of $4.51 a share on sales of $531 million, according to FactSet.
“The unexpected rapid slowdown of hard-seltzer category growth this summer significantly impacted our business,” Chief Executive Dave Burwick said in a statement. “While Truly has continued to grow, gain share and solidify its long-term position, the slower category performance has reduced our full-year growth expectations for Truly to be between 20-25% year-over-year. In addition, the capacity and inventory we had built to take advantage of a higher-growth environment resulted in significant temporary costs this quarter.”
Those “significant temporary costs” include a $133 million charge related to its seltzer inventory, which swung results from profit to a loss. In a preview of the report, MKM’s Kirk predicted that Boston Beer could take such a charge, after fellow booze salesman Constellation Brands Inc.
STZ,
took an $80 million obsolescence charge related to its seltzer efforts.
“Boston Beer only earns about $80mn/quarter in pre-tax income, so a charge just similar in size to Constellation’s would render EPS negative,” Kirk wrote. “In some ways investors would treat this as a one-time charge, but more completely obsolescence should be considered a reversal of prior period sales (writing off raw materials more appropriately treated as one-time).”
And Kirk doesn’t expect the tide to turn any time soon.
“Following this quarter, we expected shipments to go negative y/y and earnings to show contraction y/y,” wrote the analyst, who has a neutral rating and a $530 fair-value estimate on the stock. “We don’t expect Boston Beer to reinstate 2021 guidance or begin 2022 guidance.”
Boston Beer did provide guidance, however, forecasting full-year earnings of $2 to $6 a share, but noting that “actual 2021 earnings per share could vary significantly from the current projection.” The company said it would provide full guidance for 2022 when it reports full-year 2021 earnings, but also provided some assorted assumptions on specific metrics for next year, including plans to increase price nationally by 3% to 6%.
Boston Beer shares rode the seltzer wave hard, but have crashed just as hard as its popularity has waned. Shares have dropped 44.8% in the past three months, as the S&P 500 index
SPX,
increased 4.1%, and are down more than 60% from their April high, wiping away more than $9 billion in market value that had mostly accrued due to seltzer optimism in 2020.
The stock fell more than 3% in after-hours trading Thursday, after closing with a 1.1% increase at $517.22.
