Another financial services firm has lowered Boston Beer Company’s stock (SAM). RBC Capital Partners today downgraded the company’s stock from an “outperform” rating to “sector perform.”
RBC analyst Nik Modi wrote that Boston Beer’s “volume woes have not hit a bottom just yet.” He added that feedback from distributors on the company’s new products has been “mixed.”
“We think it is best to sit on the sidelines until we get more comfort with volume trends and incrementality of innovation,” Modi wrote.
As such, RBC lowered its price target to $331, down from $488.
RBC’s downgrade follows downgrades from Goldman Sachs (sell) and Bernstein (neutral) analysts.
Modi attributed the downgrade to the performance of Truly Hard Seltzer, which accounts for about half of the company’s sales. The pressure on Truly is “too much to overcome in the near term,” Modi wrote.
Hard seltzer sales are down -10% year-to-date, with dollar sales declining -15% in recent weeks in off-premise channels tracked by market research firm IRI, Modi wrote. Meanwhile, volume is down -20% over the last four-week period.
Citing Numerator data, Modi added that hard seltzer household penetration is now at 29.2% in the latest week, down 80 basis points compared to the start of the year and down 100 bps compared to mid-March. Meanwhile, repeat rates “have fared better,” but are also down compared to March (down 20 bps).
Although buy rates of hard seltzer are still up low-single-digits year-over-year in recent weeks, it “continues to see a sequential deceleration,” Modi wrote.
“While category [comparisons] should get easier, transitioning to MSD-HSD% [mid-single digits to high-single digits] comps for the remainder of the year starting in late June-early July, the current category velocities and two year trends continue to decelerate on an underlying basis making it more difficult to support a reversal of trends,” Modi wrote. “Truly’s share of hard seltzer has also regressed in the last 4 weeks and the overall hard seltzer category continues to lose share of overall beer.”
Boston Beer management had forecast 0-10% growth for the overall hard seltzer segment in 2022. Year-to-date in IRI tracked channels, the segment is declining -10%.
“Given seltzers’ recent performance, we see the category underachieving that target, even as comps ease,” Modi wrote.
“SAM’s shipment/depletion guidance of +4% to +10% implies ~HSD% depletion growth in the back half of the year as tracked channel underlying growth continues to decline,” Modi continued. “We ultimately see pressure to SAM’s FY’22 guidance due to Truly’s drag to overall growth. For the year, we see negative depletion growth as a reasonable outcome. With volumes in negative territory for the year, we acknowledge the long run growth trajectory of the business has greater uncertainty as seltzer/Truly velocities continue to slow and the company’s recent innovations remain unproven.”
On the bright side, Twisted Tea dollar sales have accelerated, up around 30% in tracked channels over the last four weeks, with the brand posting “strong growth in both ACV and total points of distribution.”
Boston Beer has received credit for its ‘needle-moving innovation over the year,” but it has has historically led to “boom-bust cycles as the company gets distribution and then repeat fades due to increased competition.” Although Boston Beer’s innovations this year have “done well gaining trial,” they have “struggled to be incremental overall.”
“Truly Margarita has reached ~4% share of hard seltzer, but share has come at the expense of previous innovations like Truly Lemonade, Punch, and Tea,” Modi wrote. “Our channel checks indicate Truly Vodka Seltzer is set to launch in August, which is late to capitalize on the peak summer selling season and support Truly growth needed this year. Bevy, which was launched this year, will be discontinued. Hard Mtn Dew has driven strong trial on limited distribution, but it remains too early to gauge ultimate potential.
“In the long term, we like SAM’s ability to innovate within the broader Beyond Beer space (seltzers, FMBs, RTDs, & ciders) but believe SAM will be in ‘prove it mode’ until clarity emerges regarding seltzer’s stabilization and innovation performance, both of which we believe will take time,” he continued.
RBC anticipates Boston Beer will lower its guidance due to pressures on Truly Hard Seltzer and the overall segment’s trends.
“With hard seltzer sales trends down double digits in recent periods, SAM’s category target of 0-10% growth is optimistic,” Modi wrote. “While we acknowledge the category [comparisons] get easier later in the year, underlying growth trends are also decelerating and we would find it most prudent if SAM guided to depletions continuing to decline on an underlying basis, which could be – MSD to HSD%. Given the cost environment we would also expect pricing to trend towards the higher end of their guided range 3-5%.”
SAM stock closed trading Thursday at $307.21, up $0.98 over the previous close. However, SAM stock is far below its 52-week high of $990.40, a tumble from its high-water mark that began on July 23, 2021.
Boston Beer will report its Q2 earnings on July 21 at 5 p.m. ET.