BOSTON, MA The Boston Beer Company, Inc. (NYSE: SAM) reported second quarter 2014 net revenue of$231.6 million, an increase of $50.3 million or 28%, over the same period last year, mainly due to core shipment growth of 25%. Net income for the second quarter was $25.4 million, or $1.88 per diluted share, an increase of $5.7 million or $0.43 per diluted share from the second quarter of 2013. This increase was primarily due to shipment increases, partially offset by increased investments in advertising, promotional and selling expenses.
Earnings per diluted share for the 26-week period ended June 28, 2014 were $2.49, an increase of $0.53 from the comparable 26-week period in 2013. Net revenue for the 26-week period ended June 28, 2014 was $415.5 million, an increase of $98.2 million, or 31%, from the comparable 26-week period in 2013.
Highlights of this release include:
- Depletions grew 23% and 28% from the comparable 13 and 26 week periods in the prior year.
- Gross margin of 53.1% for the second quarter and 51.4% for first half, with the Company maintaining its full year gross margin target of between 51% and 53%.
- Advertising, promotional and selling expense increased by $15.7 million or 31% in the quarter, primarily due to planned increased investments behind the Company's brands.
- Full year 2014 depletions growth is now estimated to be between 20% and 24%, an increase from the previously communicated estimate of 16% to 20%.
- Full year 2014 estimated earnings per diluted share remain unchanged at $6.00 to $6.40.
- Full year 2014 capital spending is now estimated to be between $160 million to $185 million, a narrowing of the range from the previously communicated estimate of $160 million to $220 million.
Jim Koch, Chairman and Founder of the Company, commented, "We achieved depletions growth of 23% and record total depletions in the second quarter. I am tremendously proud of the efforts of our employees in achieving this record, while maintaining a focus on brewing quality and innovation. We believe that our depletions growth is attributable to strong sales execution and support from our distributors and retailers as well as our quality beers and strong brands. We were also delighted to learn that, for the sixth year in a row, our distributors ranked us the number one beer supplier in the industry, in the annual poll of beer distributors conducted by Tamarron Consulting, a consulting firm specializing in the alcohol beverage distribution industry. This is a testament to the efforts of all Boston Beer employees to service and support our distributors' business and to the relationships we have built with them. Overall, our brand portfolio is healthy and we remain positive about the future of craft beer."
Martin Roper, the Company's President and CEO stated, "In the second quarter, our depletions growth benefited from the strength of our Samuel Adams, Angry Orchard and Twisted Tea brands. We believe that the growth we see in our main brands reflects a response to our increased investments in media, local marketing and point of sale and the efforts of our increased sales force, even as we face a more competitive environment. Accordingly, we have increased our expectations for full year depletions growth to between 20% and 24% to reflect the most recent trends. We are planning continued increases in investments in advertising, promotional and selling expenses behind existing brands in an attempt to maintain the momentum, as well as in innovation, commensurate with the opportunities and the increased competition that we see."
Mr. Roper went on to say, "Our supply chain performance still remains below our expectations but is improving. The high demand levels and the large number of expansion and efficiency projects ongoing during the quarter caused us to experience higher operational costs than we had originally expected. We are also seeing pressure from our transportation suppliers and experiencing increased freight costs to secure the performance and capacity that we need. Despite our best efforts, we had some continued product shortages and service issues during the quarter. Many of our major capital projects were completed during the last 45 days, allowing us to focus more on training, process improvement and predictable operations. We are appreciative of the tremendous effort of our Brewery and Engineering teams to complete these projects successfully while we operate at peak levels. Looking forward, we expect a continued high level of brand and capital investments, as we pursue growth and innovation. We are prepared to forsake the earnings that may be lost as a result of these investments in the short term, as we pursue long term profitable growth."
2nd Quarter 2014 Summary of Results
Depletions grew 23% from the comparable 13-week period in the prior year primarily due to increases in the Company's Angry Orchard®, Samuel Adams® and Twisted Tea® brand products.
Core shipment volume was approximately 1.1 million barrels, a 25% increase compared to the second quarter of 2013.
The Company believes distributor inventory levels at June 28, 2014 were at appropriate levels. Inventory at distributors participating in the Freshest Beer Program at June 28, 2014 increased slightly in terms of days of inventory on hand when compared to June 29, 2013. The Company has over 65% of its volume on the Freshest Beer Program and it believes participation in the Program could reach up to 70% of its volume by the end of 2014.
Gross margin decreased to 53.1% from the 53.6% achieved in the second quarter of 2013. The margin decrease was a result of product mix effects and increases in packaging and ingredient costs that were only partially offset by price increases.
Advertising, promotional and selling expenses were $15.7 million higher than costs incurred in the second quarter of 2013. The increase was primarily a result of increased investments in media advertising, increased costs for additional sales personnel and commissions, point of sale and local marketing, and increased freight to distributors due to higher volumes.
General and administrative expenses increased $1.8 million compared to the second quarter of 2013, primarily due to increases in salary and benefit costs.
Year to Date 2014 Summary of Results
Depletions grew by 28% from the comparable 26-week period in 2013, primarily due to increases in Angry Orchard, Samuel Adams, and Twisted Tea brand products.
Core shipment volume was approximately 1.9 million barrels, a 28% increase from the comparable 26-week period in 2013.
Advertising, promotional and selling expenses were $33.6 million higher than costs incurred in the comparable 26-week period in 2013. The increase was primarily a result of increased investments in media advertising, point of sale and local marketing, increased costs for additional sales personnel and commissions, and increased freight to distributors due to higher volumes.
General and administrative expenses increased by $3.0 million from the comparable 26-week period in 2013, due to increases in salary and benefit costs and consulting costs.
The Company's effective tax rate increased to 37% from 36% in the comparable 26-week period in 2013. The lower 2013 rate was primarily a result of the favorable impact of a federal income tax settlement of $0.07 per diluted share in 2013.
The Company expects that its June 28, 2014 cash balance of $31.3 million, together with its future operating cash flows and its $150.0 million line of credit, will be sufficient to fund future cash requirements.
Depletion estimates
Year-to-date depletions through the 29 weeks ended July 19, 2014 are estimated by the Company to be up approximately 27% from the comparable period in 2013.
Outlook
The Company has left unchanged its projected 2014 earnings per diluted share of between $6.00 and $6.40. The Company's actual 2014 earnings per share could vary significantly from the current projection. Underlying the Company's current projection are the following estimates and targets:
- Depletions and shipments growth of between 20% and 24%.
- National price increases of approximately 2%.
- Gross margins of between 51% and 53%.
- Increased investment in advertising, promotional and selling expenses of between $37 million and $45 million, an increase of the range from the previously communicated estimate of $34 million to $42 million. This does not include any increases in freight costs for the shipment of products to the Company's distributors.
- Increased expenditures of between $3 million and $5 million for continued brand investments in existing Alchemy & Science brands, which are included in our full year estimated increases in advertising, promotional and selling expenses. These estimates could change significantly and 2014 volume from these brands is unlikely to cover these and other expenditures related to these projects that could be incurred.
- Effective tax rate of approximately 38%.
- Capital spending of between $160 million and $185 million, which could be significantly higher, dependent on capital required to meet future growth. These estimates include capital investments for existing Alchemy & Science projects of between $7 million and $9 million.
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