Weak Q4 Profit, Depressing 2023 Outlook Disappoint Boston Beer Investors

We plan to lower narrow-moat Boston Beer’s SAM $670 fair value estimate by a high-single-digit rate after digesting fourth-quarter results and a 2023 outlook that implies little near-term improvement. While the top line was solid, with shipments up 17% (extra week helped by nearly 600 basis points) and depletions up 3%, leading to total sales growth of 29%, profitability remains depressed. The gross margin of 37% was up from 29% in the year-ago period, but remains well below prepandemic marks near 50%, hindered by mix and supply chain inefficiencies. With respect to mix in depletions, Twisted Tea and Hard Mountain Dew fared well in the period, but key brands like Truly, Angry Orchard, Sam Adams, and Dogfish Head declined, implying shortfalls in takeaway have yet to bottom. With depletions through Feb. 11 down 4%, poor retail demand persists.

We surmise the double-digit drop in shares is attributable to a soft 2023 outlook from the company that includes shipment declines of 2%-8% and a gross margin of 41%-43%. This is materially below our preprint forecast for shipment increases of 5%-6% and a gross margin trending back to historical levels, at 46%. With EPS now set for a range of $6-$10, handily below our $14 projection and roughly in line with the $7 in adjusted EPS captured in 2022, a full restoration of profitability will take time. Moreover, some of the profitability assumptions this year are contingent on an improving second half, a factor we don’t think is exactly in the bag, given macroeconomic uncertainty and considering the competitive nature of the fragmented flavored malt beverage and ready-to-drink categories. With the hard seltzer industry set for another year of 10%-15% volume declines in 2023, headwinds are likely to persist, and growth will have to stem from other beyond beer category innovations that could take time to ramp.