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Boston Beer Co (SAM -3%) slips after lowering its FY24 GAAP EPS outlook on Friday after the close following its announcement of restating an existing production agreement with Rauch North America. The agreement included a commitment to minimum capacity availability by Rauch, with SAM obligated to meet annual minimum volume commitments. If it did not, it was subject to contractual shortfall fees.

Under the amendment, SAM agreed to pay $26 mln in cash to better match SAM's future capacity requirements, allowing heightened production flexibility and more advantageous termination rights. This payment is expected to clip $1.70 in after-tax GAAP EPS in Q4, resulting in a lowered GAAP EPS guidance for the year to $3.80-$5.80 from $5.50-$7.50. However, SAM still reiterated its FY24 adjusted EPS and depletions and shipments forecasts.

• Heading into FY24, SAM anticipated falling short of its future annual volume commitments at various third-party production facilities, resulting in expected shortfall fees. On Friday, SAM reiterated its expectation that these fees will hurt gross margins by 65-75 bps in FY24. When adding in production and prepayment amortization, SAM sees a 160-180 bp impact on margins.
• Shortfall fees do not always mean that volumes are missing internal goals. Instead, it can mean that SAM's regional mix changed. It also could be due to SAM's expansion in international markets. This shows up in SAM reiterating its FY24 depletions and shipments outlook for the year, continuing to project a low single-digit percentage decline. This outlook was reduced last quarter, taking the possibility of flat depletions and shipments growth off the table, reflecting lingering challenges associated with SAM's Truly Hard Seltzer brand.
• Truly Hard Seltzer business endured an 11% volume decline in measured channels in Q3. SAM continues testing various strategies to reignite Truly demand, such as being more discerning over flavors. At the same time, SAM's once-resilient Twisted Tea brand encountered softening demand last quarter. While SAM has seen positive signals from the early rollout of its American Light beer across new markets, overall depletion trends were not shaping up favorably exiting Q3, resulting in its lowered guidance.

SAM commented in late October that as its contractual terms expire, it will reassess its capacity needs and commitments with production partners. Shortfall fees tend to weigh considerably on Q4 margins. Reducing these headwinds can help preserve the annual margin drop-off SAM has experienced in recent years. Nevertheless, other headwinds remain, from a saturated hard seltzer market to slowing demand for its typically resilient Twisted Tea banner. As we mentioned following Q3 results in October, SAM may struggle over the near term until a sustained turnaround within its Truly Hard Seltzer business emerges.