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The Science of Hitting
The Science of Hitting
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Boston Beer Q3 2011 Financial Results

November 02, 2011 | About:

Tuesday after the close, Boston Beer Company (NYSE:SAM), the enterprise behind the well-known craft brand Samuel Adams, reported third quarter 2011 earnings. As I noted in an article after the Q2 call, the company cut their guidance for the full year, which caused the stock to fall more than 10% on the day; the stock would continue falling, and reached a low of roughly $70 a share in the past quarter after almost breaking through $100 at the end of 2010. After Q3, it appears that the stock has started moving back in the right direction; here are some of the highlights from the quarter:

Depletions growth in the quarter increased 11% year over year, resulting in record total depletions for the company despite one less selling day; year to date, depletions have increased 8% on an equal number of selling days. The improvement in Q3 (which compares to 7% depletions growth through the first six months of the year) was largely attributed to the success of the company’s seasonal program.

Net revenue was $134.8 million, an increase of $10.3 million (8%) over Q3 2010, largely due to a 7% gain in shipment volumes. As a result of the double digit increase in depletions in Q3, management upped their full year projection for growth to between 7.5% and 9% from 7% to 8%.

Gross margins in the quarter were 56%, the same as in Q3 of 2010; year-to-date, gross margins are at 55%, a slight increase compared to 54.6% through the first nine months of last year. For the full year, management is targeting gross margins between 54% and 56%.

Net income for the third quarter was $16.3 million, or $1.19 per diluted share, an increase of 9.2% ($0.10 per share) from the third quarter of 2010; this increase was due to volume increases, which were partially offset by increased investments in advertising, promotional and selling expenses. After adjusting for the Freshest Beer Program ($0.02 in the quarter), diluted EPS in the quarter was 11% higher than Q3 2010.

In regards to the Freshest Beer Program, here is what Jim Koch, Chairman and Founder of the Boston Beer Company, had to say about the program’s implementation and its progress to date:

“We are pleased with the results so far, and currently have over 25 wholesalers signed up and at various stages of inventory reduction. We believe that in the long term this program will deliver better, fresher Samuel Adams beer to our drinkers and should reduce costs and improve efficiency throughout the supply chain. We are still targeting that 50% of our volume will be on our Freshest Beer Program by the end of 2011 and believe this could reach 70% by the end of 2012.”

Since the start of the year, the company has repurchased more than 600,000 shares of its Class A common stock a cost of approximately $50.9 million (average cost of $83.33 per share). In addition, the board approved at the end of October to increase the limit of the previously approved $250 million share buyback expenditure limit by $25 million, for a new limit of $275 million (approximately $25.5 million of which is remaining).

As a result of the strong quarter, management reversed their move from Q2 and increased full year EPS projections. Management is now targeting full year diluted EPS to be between $3.60 and $3.90 (including $0.10-$0.20 from reduced shipments due to the implementation of the Freshest Beer Program) from the $3.20 to $3.60 previously guided; this increase is expected to be split between increased volume and the estimated favorable impact of a state income tax settlement in the fourth quarter ($0.13 to $0.18 per diluted share).

On the day, the stock rocketed higher, testing peaks last touched in December of 2010; at the close, the stock was up nearly 15%, at just over $99 per share.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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