Dear Client:

The stakes keep getting higher, but Boston keeps pulling the rabbit out of the hat, quarter after quarter. For depletions, at least: The company just reported Q1 depletions up 36%, or up 30% without Dogfish Head (which they of course acquired last summer). Shipments were up more than 32% for the quarter (27.5% without Dogfish). 

Net revs were up 31.4%. 

That’s the eighth straight quarter of double digit depletion growth for the company. Recall, for Q4 2019, the company reported depletions up 25%, and 22% for the entire year.  

Chief Dave Burwick attributed Q1 depletions growth to “increases in our Truly Hard Seltzer and Twisted Tea brands and the addition of the Dogfish Head brands that were only partially offset by decreases in our Angry Orchard and Samuel Adams brands.” Those latter two brands are “deeply impacted” by the shutdown of the on-premise, and they do not expect them to grow this year.  

First quarter trends were indeed affected by COVID buying patterns: The earnings period covered the 13 weeks to March 28. Meanwhile, “the Company began seeing the impact of the COVID-19 pandemic on its business in early March,” per its earnings release.  “Prior to then, the Company was on track to maintain its financial guidance for full-year fiscal 2020,” which expected depletions and shipments would be up between 15% and 25%.  

PAUSING GUIDANCE. But “given the many rapidly changing variables related to the pandemic, the Company is currently not in a position to accurately forecast the future impacts of the pandemic and is withdrawing its full-year fiscal 2020 financial guidance. ” 

(To try and peg trends before COVID impact, Boston explained that “depletions through the 9-week period ended February 29, 2020 are estimated by the Company to have increased approximately 32% from the comparable period in 2019.  Excluding the Dogfish Head impact, depletions increased 26%.”)

MARGIN UNDER MORE PRESSURE. With the costs of producing seltzer, Boston’s margin has been a sticking point in recent quarters. Add in the crucible of COVID, and that number gets tougher. 

Q1 gross margin was 44.8%, 4.7 percentage points below YA. They attributed that to “higher processing costs due to increased production at third party breweries and higher processing costs and finished goods keg inventory write-offs at Company-owned breweries, of which $3.6 million was direct costs related to COVID-19, partially offset by price increases and cost saving initiatives at Company-owned breweries.”

 
But: “Excluding the Company’s current assessment of the impact of estimated COVID-19 returns and other related direct costs, first quarter gross margin was 46.8%.”

“To date, the direct impact of the pandemic has primarily shown in significantly reduced keg demand from the on-premise channel and higher labor and safety related costs at the Company’s breweries,” the company said. 

KEG RETURNS COSTLY. “In the first quarter of 2020, the Company has recorded COVID-19 pre-tax related reductions in net revenue and increases in other costs that total $10 million.  This amount consists of a $5.8 million reduction in net revenue for estimated keg returns from distributors and retailers and $4.2 million of other COVID-19 related direct costs, of which $3.6 million are recorded in cost of goods sold and $0.6 million are recorded in operating expenses.

“In addition to these direct financial impacts, COVID-19 related safety measures resulted in a reduction of internal capacity. This has shifted more volume to third-party breweries, which increased production costs and negatively impacted gross margins. The Company will continue to assess and manage this situation and will provide further updates in its second quarter earnings release, to the extent that the effects of the COVID-19 pandemic are then known more clearly.”

More after the call. 

Until tomorrow,

Jenn, Jordan, and Harry 

“When a friend is in trouble, don’t annoy him by asking if there is any thing you can do. Think up something appropriate and do it.” 

– Edgar Watson Howe 

———- Sell Day Calendar ———-

Today’s Sell Day: 14

Sell days this month: 22

Sell days this month last year: 22

This month ends on a: Thurs.

This month last year ended on a: Tues.

YTD sell days Over/Under:  +1