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How Did Boston Beer Overestimate Truly Demand by So Much?

The Truly brand isn't growing as fast this summer as Boston Beer (NYSE: SAM) executives thought it would. The brewer on Thursday lowered its sales and earnings outlook for the hard seltzer after demand slowed through late June.

The new forecast keeps the company at the top of the industry when it comes to growth, with volumes that companies like Anheuser-Busch InBev (NYSE: BUD) and Constellation Brands (NYSE: STZ) would be thrilled to have. However, it also implies a tough road ahead for the Truly franchise, which Boston Beer had been counting on to deliver most of its sales gains in 2021.

Let's look at why the company's late April demand forecast was so wrong, and what that might mean for the stock.

Image source: Getty Images.

Depletions are slowing

Depletions, a measure of consumer sales, hit a wall over the three-month period that ended in late June. Boston Beer reported a 24% increase, equating to half the growth rate it notched in the prior quarter. CEO Dave Burwick and his team had forecast, and Wall Street had expected, at least a 40% spike in Q2. "We overestimated the growth of the hard seltzer category," Burwick said in a press release, "which negatively impacted our volume and earnings."

It was a consequential miss. Boston Beer took a gamble on ramping up production and shipments to retailers last quarter in preparation for a summer demand surge. The slowdown instead resulted in inflated inventory levels at stores and higher costs across the board. Earnings fell as profit margins contracted in Q2.

How to misread a market

Executives ticked off several reasons for the miss. The biggest was what they see as a maturing market for hard seltzer, with fewer opportunities to convert new customers. That's a jarring update since Wall Street was hoping that this maturation point was further off.

Boston Beer also blamed the post-pandemic consumer behavior shift that is pushing drinking behavior back toward bars and restaurants. Finally, a flood of competition tripped up the business. The influx of new rivals achieved what the smaller group of early alternatives in hard seltzer brands couldn't do throughout 2020. There was a "proliferation of choices and consumer confusion," in the hard seltzer niche in Q2, executives said.

What it means for the stock

The good news is that Truly is still winning market share and delivering industry-leading growth for Boston Beer. Even the bottom end of its new outlook calls for depletions to rise 25% this year. Constellation Brands, whose Corona-branded product is the fourth-best-selling hard seltzer on the market, is growing at less than half that rate today.

Yet the reduced outlook is unwelcome news for Boston Beer investors. A more mature industry niche means weaker profit margins due to the flood of extra choices available to consumers. That problem will be amplified by the already-elevated inventory sitting at retailers and bars today.

Beyond that, shareholders might understandably be worried about Boston Beer's grasp on the industry given its latest forecasting mistake. To be sure, its new update covers an unusually wide range, with growth expected to fall somewhere between 25% and 40% this year.

Landing near the high end of that outlook would be an unqualified win for the brewer following last year's 37% depletion spike. But investors were looking for more, and the jarring growth shift has them feeling less optimistic heading into the second half of 2021.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands. The Motley Fool recommends Anheuser-Busch InBev NV and Boston Beer. The Motley Fool has a disclosure policy.


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