In this segment of the Motley Fool Money radio show, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Supernova and Rule Breakers' David Kretzmann look into a couple of big beverage purveyors, starting with the surprisingly good quarterly numbers Boston Beer (NYSE: SAM) served up last week. The brewer has been in a rough patch lately. While other craft beer brands have been growing, it has not. This time around, beverages other than beer gave it a boost -- but can that momentum be maintained?
Meanwhile, Starbucks (NASDAQ: SBUX) turned in a less-than-pleasant report, and revealed it was closing all of its Teavana stores, which sent shares spiraling. Yet the overall results might not have been as bad as the market's reaction would indicate.
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A full transcript follows the video.
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This video was recorded on July 28, 2017.
Chris Hill: Second quarter profits for Boston Beer Company came in much higher than expected, sending shares of Boston Beer up more than 15% on Friday. Jason, have you been doing your part to help boost sales this summer?
Jason Moser: Always, always doing my part, Chris. You mentioned, the numbers they turned in were higher than expected. This is a big pop for the stock today. I would tell investors to be very careful not to make the big leap of thinking everything is back to just fine with these guys. They grew the top line 1%. It wasn't like it was double digit growth. They didn't guide down, and I think that was a big deal. This past year has been really a series of misses and revisions guiding downward, as they continued to be assaulted on all fronts in this competitive craft beer market. And that's not going to stop. A lot of the success for Boston Beer actually came from robust sales in the Twisted Tea and the Truly Spiked & Sparkling hard seltzer categories. Those are relatively new, so it's neat to see the performance there, but I have a feeling this may take a turn kind of like with what we saw with the Angry Orchard Cider category. At some point, the novelty wears off, and it comes back down to earth.
I'm not trying to make it sound like it's all doom and gloom for these guys. There's still plenty of competition out there, and reasons to be concerned. By the same token, it is a good business with a very strong brand. Jim Koch was very clear on the call, they are going to continue investing in that brand. They saw decent performance from Sam Summer at the beginning of the summer here, and it seems like it's carrying on over through the remainder of the season here, which is good. That's a big seller for them. And they narrowed their earnings range a little bit for the year, which raised the low end of that guidance. So, it was a good quarter. It was a respectable quarter. Still plenty of work to do.
Matt Argersinger: One of the things that I thought was interesting was that Jim Koch also on the call actually called out for the first time a slowdown in the overall craft beer market. I think we've been hinting at that and seeing signs of it, but we're seeing him call that out now. And I think one of our thesis in MDP for a while was, once the overall market slows down, that's when you'll see Boston Beer's strength shine through. And it'll be interesting to see if that actually happens.
Moser: Yeah, that really makes it difficult for those small operators to prosper at all. They just don't have the same cost structure advantage that Boston Beer does. There really is an advantage there, in the production facility that they have.
Hill: Starbucks down big on Friday after the company's third quarter report. Revenue was light, guidance was lowered, and Starbucks announced it is closing all of its Teavana stores. Matty, I'm not selling my shares, but I totally understand why other people are selling their shares.
Argersinger: Right. Guidance was the killer, for one thing. They said, for the full year now, the revenue was going to come on the lower end of their 8-10% range. They also lowered their EPS estimates. They're closing Teavana stores, they're still having some bottlenecks with mobile ordering. So, there's a lot of news out there saying, things are OK at Starbucks, but not great, and certainly not getting better. I'll point to the comps. 5% comps in the U.S. Investors were complaining forever about being below that number. The 7% higher comps in China I thought was pretty strong. And the Teavana story is interesting. They're shuttering all the stores. This is a business they bought for $620 million about five years ago. They're going to do about $1.6 billion in branded Teavana sales in Starbucks stores. So, you could argue that it's kind of disappointing that this retail concept didn't really work out for Teavana, but certainly the brand is creating value for Starbucks.
Moser: Yeah. I think a lot of people will point to that acquisition and say, "See, we told you back when they did it that it wasn't a good one." I mean, let's be very clear, that was not about the retail presence. That was free if it worked out for them, but it was about getting that brand and expanding that menu of offerings. You just look to the success of the Tazo Tea brand to this point, they're doing the same thing with Teavana, just now they don't have to maintain this network of stores in malls, where traffic is basically doing nothing but declining anyway.
David Kretzmann: Yeah. And speaking to Teavana, they also announced a partnership pretty recently with Anheuser-Busch, where they will be rolling out prepared Teavana beverages. That's another lever they can pull with that brand. One yellow flag that stuck out to me is, the number of rewards members they have in that loyalty program has actually plateaued at 13.3 million, that's the same number they had in the last quarter. Still up 8% year over year, but that's a number I would hope they could keep ticking up steadily each quarter.
Chris Hill owns shares of Starbucks. David Kretzmann owns shares of Anheuser-Busch InBev NV, Boston Beer, and Starbucks. Jason Moser owns shares of Boston Beer and Starbucks. Matthew Argersinger owns shares of Boston Beer and Starbucks. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV, Boston Beer, and Starbucks. The Motley Fool has a disclosure policy.