Boston Beer Depletions and Shipments Increase 11% in Q3; Hard Seltzer Slow Down Fallout Quantified

Boston Beer Company’s second quarter earnings call in July set the stage for a tumultuous third quarter that saw the company pull its financial guidance and anticipate write-off costs related to excess hard seltzer inventory, which was followed by a rush of investor lawsuits.

Although the Q2 earnings report left analysts flummoxed and disappointed, the company’s third quarter earnings report came with less of a jolt but more of the residual sting of the slowdown in hard seltzer growth and lowered expectations.

Boston Beer — maker of Truly Hard Seltzer, Twisted Tea, Samuel Adams, Dogfish Head and Angry Orchard products — reported Q3 depletions and shipments increases of +11% and +11.2%, respectively. Depletions growth was credited to all but Boston’s Angry Orchard cider brand. Meanwhile, the company shipped 2.3 million barrels of product during the quarter, with increased shipments credited to Twisted Tea, Samuel Adams and Angry Orchard that were partially offset by Truly and Dogfish Head declines.

Net revenue for the three-month period ending September 25 increased 14%, to $561.6 million, while the company recorded a $58.4 million net loss (or $4.76 per diluted share), which the company said was “primarily a result of direct and indirect volume adjustment costs of $133.0 million, or $7.73 per diluted share, net of tax benefits, due to slower than anticipated hard seltzer growth.”

“The unexpected rapid slowdown of hard seltzer category growth this summer significantly impacted our business,” Boston Beer president and CEO Dave Burwick said in the release. “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.”

Even with the decelerating trends in hard seltzer, Burwick said he expected them to “remain a very important segment of the beer market in the future.” He noted that hard seltzers now account for 11% of total beer dollar sales year-to-date, up from 9% at this time in 2020.

“We’ve been playing to win and have reaped many benefits over the past 18 months,” he said in the release. “So far this year, Truly has generated 54% of all hard seltzer category growth. In addition, Truly has achieved the second-highest household penetration in all of beer behind only Bud Light beer and ahead of all its other hard seltzer and beer industry competitors. ”

The write-offs related to slower hard seltzer growth foretold prior to the Q3 earnings report have since crystallized in $102.4 million in direct costs to the company. Those include $54.3 million for “inventory obsolescence, destruction costs and other inventory related costs;” $35.4 million for contract termination costs primarily for “excess third-party contract production;” and $12.7 million in equipment impairments.

Additionally, Q3 also included indirect costs to the company of $30.6 million, which the company said included “unfavorable absorption impacts at company-owned breweries and downtime charges at third party breweries of $11.4 million, increased materials sourcing and warehousing costs of $11.8 million and customer return provisions for out of code or damaged products of $5.4 million and other costs of $2.0 million.”

Boston Beer added that its wholesaler inventory as of September 25 was at an average of about six weeks on hand, which the company said was appropriate for each brand except for Truly, “which had significantly higher than planned distributor inventory levels for certain styles and packages.”

“To address the slowing demand and continued uncertainty on future volume projections for Truly, the company is working closely with its distributors to reduce Truly distributor inventory levels,” the company said. “The company adjusted production and shipments during the third quarter and expects to continue to do so during the remainder of the year.”

Gross margin for the quarter took a hit, as the 30.7% margin in Q3 represented a decline from the 48.8% margin in Q3 of 2020, which the company attributed to $84.9 million in direct and indirect volume adjustment costs related to hard seltzers and higher material costs.

Year-to-date through September 25, Boston Beer reported depletions and shipment growth of 24% and 29.7%, respectively. The company’s net revenue through three quarters reached $1.71 billion, a 34% increase compared to the same period in 2020. However, net income of $66.3 million ($5.33 per share) for the year so far represented a decrease of $92.8 million (or $7.57 per diluted share) compared to the previous year.

Boston Beer’s year-to-date results included $41.5 million in indirect costs related to hard seltzer’s slowing growth trends.

Gross margin for the year was 40.8%, down from 46.9% through three quarters of 2020, which the company said was due to $95.8 million in volume adjustment costs related to seltzers slowing trends and higher material costs.

Boston Beer also offered a depletion estimate for the 42-week period ending October 16, as depletions increased about 23% compared to 2020.

For full year 2021, Boston Beer is now estimating depletions and shipments to increase between 18% and 22%, with its gross margin to be between 40% and 42% for the year with full year with direct and indirect costs of the hard seltzer slowdown estimated at $132.6 million; $95.8 million of those costs were incurred through the first three quarters and $36.8 million expected in Q4.

Boston Beer also offered a preliminary outlook for 2022, including deletions and shipments growth of between mid-single digits and low-single digits. The company expects gross margin to be between 45% and 48%. The company also expects national price increases between 3% and 6%.

Looking ahead to 2022, Boston Beer founder and chairman Jim Koch cited Boston Beer’s “balanced portfolio of strong brands and a pipeline of innovative products” as reasons the company is positioned to succeed in the next year and beyond “as consumers look to drink more ‘Beyond Beer’ products.”

“We believe we have the best brewers, the best high-end brands – with potential yet to be fully tapped – as well as the best salesforce and the best innovation again for 2022,” he added. “We are fixing our capacity and supply chain issues, our marketing is hitting its stride, and we have the best distributor network behind us. We have a company and culture that not only delivers double-digit growth over extended horizons, but also demonstrates resilience and agility when faced with challenges. We will continue to work hard to prove our ability to outgrow the beer category for many years to come.”