Boston Beer Co (SAM, Financial) saw its shares slip by 3% after it lowered its FY24 GAAP EPS outlook. This adjustment follows the restatement of a production agreement with Rauch North America, which includes commitments to minimum capacity from Rauch and annual volume commitments from SAM. Failure to meet these commitments results in contractual shortfall fees.
As part of the amended agreement, SAM will pay $26 million in cash to align better with future capacity needs, enhancing production flexibility and termination rights. This payment is expected to reduce Q4 after-tax GAAP EPS by $1.70, adjusting the annual GAAP EPS guidance to $3.80-$5.80 from $5.50-$7.50. Despite this, SAM reiterated its FY24 adjusted EPS and depletions and shipments forecasts.
- SAM anticipates falling short of future annual volume commitments at various third-party facilities, leading to expected shortfall fees impacting gross margins by 65-75 basis points in FY24. Including production and prepayment amortization, margins could be affected by 160-180 basis points.
- Shortfall fees do not necessarily indicate missed internal volume goals; they may result from changes in SAM's regional mix or international expansion. SAM maintains its FY24 depletions and shipments outlook, projecting a low single-digit percentage decline, reflecting ongoing challenges with the Truly Hard Seltzer brand.
- The Truly Hard Seltzer business experienced an 11% volume decline in Q3. SAM is testing strategies to boost Truly demand, such as refining flavor offerings. Meanwhile, demand for the Twisted Tea brand softened last quarter. Although the American Light beer rollout showed promise, overall depletion trends were unfavorable at the end of Q3, prompting the lowered guidance.
SAM stated in late October that it would reassess its capacity needs and commitments with production partners as contractual terms expire. Shortfall fees significantly impact Q4 margins, and reducing these could help stabilize the annual margin decline SAM has faced in recent years. However, challenges persist, including a saturated hard seltzer market and declining demand for Twisted Tea. Until SAM achieves a sustained turnaround in its Truly Hard Seltzer business, near-term struggles may continue.
