Boston Beer Still Doesn't Get Why Its Turnaround Is Failing

By Rich Duprey Markets Fool.com

Boston Beer (NYSE: SAM) is apparently learning the wrong lessons from its fourth quarter earnings performance. Because revenue rose 2% for the period, the craft brewer thinks it is a good idea to continue with the same strategy it has employed to turn its business around.

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On the surface, that would seem wise, assuming relevant initiatives drove the gains. But as it turns out, depletions continued to fall in the quarter, which suggests their prescriptions for fixing the underlying issues remains insufficient. Continuing on the same path will mean further declines in the future.

Boston Beer founder and chairman Jim Koch. Image source: Boston Beer.

The benefits of just one extra week

The maker of Samuel Adams beer said fourth quarter revenue rose to $219.4 million, primarily because shipments rose 2% due to the extra selling week. There were 14 weeks in the fourth quarter compared to just 13 in the year-ago period. That also benefited profits, which jumped 35% to $22.2 million, even though gross margin fell. The extra time to ship beer, as well as the cost-cutting initiatives it has implemented, helped Boston Beer improve its profitability.

Yet the brewer acknowledges the immediate future is looking pretty stale. Founder and chairman Jim Koch rattled off a litany of woes confronting his company and the industry, including a soft craft beer and cider market, a weak retail environment, increased competition, and the failure of its new seasonal beer to gain traction. Depletions, or sales to distributors and retailers, which is considered an industry proxy for demand, fell 1%.

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These were mainly the same problems that afflicted Boston Beer last year, causing it to undertake the cost-cutting program in the first place. The company also went on to implement new packaging promotions and seasonal flavors. Forging ahead with more of the same won't change anything.

The same old, same old

Retiring president Martin Roper said the brewer's plan to return Samuel Adams and Angry Orchard to growth meant hitting the same notes of "packaging, innovation, promotion and brand communication initiatives." Unfortunately, it's likely that not even Boston Beer thinks this strategy will be a success.

The company offered up earnings guidance for the full year with a range large enough to drive a beer truck through. The craft brewer expects profits in 2017 to come in anywhere from $4.20 to $6.20 per share, which on the whole makes the exercise meaningless. That means management believes earnings will decline somewhere between 9% and 38% this year, putting it some 42% below 2015 results.

Image source: Boston Beer.

While some analysts contend beer drinkers do respond to ads, changing up packaging has been attempted by Boston Beer in the past, and it failed to deliver. In an industry filled with new breweries, new blends, and more, "innovation" is no easy task. Even with its latest offering, pine and grapefruit did not seem to work with the brewer's spring seasonal Hopscape.

Awash in craft beer

Today there are more than 5,000 breweries operating in the U.S. and more in the planning stages. With popularity growing these days for locally brewed concoctions, Boston Beer is seen as the granddaddy of them all -- and that's not a good thing. There also seem to be few options open to it. Hard tea, soda, and water may be enjoying some success, but those remain fads, not major long-term trends. Ultimately, the company may need to follow the lead ofAnheuser-Busch InBev, Constellation Brands, and other brewers who have been forced to resort to -- namely, making acquisitions.

Anheuser-Busch has scooped up a dozen or so craft brewers over the past few years, and Constellation bought Ballast Point Brewing, which it contends remains the fastest growing craft beer in the country. Boston Beer may have reached the scale where it needs to acquire small, upstart brands if it wants to drive real growth in its business again.

However, since Boston Beer currently says all it plans to do is offer up cosmetic changes, it suggests the brewer doesn't understand why it's struggling.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV and Boston Beer. The Motley Fool has a disclosure policy.