Boston Beer Earnings: Margins Expanded on Improving Sales Trends and Efficiency Gains

Narrow-moat Boston Beer SAM posted better-than-expected third-quarter results as product innovation coupled with supply chain cost savings drove better pricing and margins. Sales growth of 1% reversed the negative first-half trend, and adjusted EPS rose 23%, both outpacing our estimates for sales and adjusted EPS to fall by 2% and 5%, respectively. Management nudged up 2023 pricing and gross margin guidance to 2.5% and 42.5% at the midpoints, up from 2% and 42%, respectively, which we take as a positive sign that sales and margin recovery are expected to take hold. We plan to tweak our 2023 projections to align with the updated outlook but see no need to change our 10-year projection for mid-single-digit topline growth and low-teens average operating margins. We expect to maintain our $497 fair value estimate and view shares as undervalued at a 26% discount.

We are encouraged by the steady volume demand and healthy sell-through trends in Boston Beer’s quarterly report, as indicated by the 4% price increase (above the 2%-3% range guided for 2023), and management comments that it sees no signs of excess distributor inventory buildup for any of its brands at the end of September. We view Twisted Tea as continuing to resonate with consumers in the new territories (including Texas and California) and in the on-premises channel and expect the scheduled launches of Twisted Tea Light and Extreme to recruit new drinkers and expand drinking occasions. In addition, we think Truly’s efforts to preserve its brand intangibles with innovation (in flavors and variety packs) and more targeted digital marketing have begun to pay off, thereby helping the brand defend volume share amid the ongoing hard seltzer reshuffling. Operating margins expanded by 380 basis points to 10.2%, thanks to better capacity utilization, waste reduction, and freight cost savings. We see further room for margins to rebound as the topline continues to recover in the coming quarters.