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Duckhorn (NYSE:NAPA) Misses Q1 Sales Targets


Full Report / December 06, 2023

Wine company The Duckhorn Portfolio (NYSE:NAPA) fell short of analysts' expectations in Q1 FY2024, with revenue down 5.2% year on year to $102.5 million. The company's full-year revenue guidance of $423.5 million at the midpoint also came in 1.4% below analysts' estimates. It made a GAAP profit of $0.13 per share, down from its profit of $0.17 per share in the same quarter last year.

Duckhorn (NAPA) Q1 FY2024 Highlights:

  • Revenue: $102.5 million vs analyst estimates of $103.6 million (1% miss)
  • EPS: $0.13 vs analyst expectations of $0.15 (13.6% miss)
  • The company reconfirmed its revenue guidance for the full year of $423.5 million at the midpoint
  • Free Cash Flow of $7.67 million is up from -$40.39 million in the previous quarter
  • Gross Margin (GAAP): 52.5%, up from 50.6% in the same quarter last year
  • Sales Volumes were down 3.4% year on year

With many of their grapes sourced from the famous Napa Valley region of California, The Duckhorn Portfolio (NYSE:NAPA) is a producer of premium wines and known for its Merlot and other Bordeaux varietals.

The company goes to market with brands such as Duckhorn Vineyards, Paraduxx, Goldeneye, Migration, and Canvasback. In addition to the Merlots and Bordeauxs for which they’re known, Duckhorn Portfolio also offers Cabernet Sauvignon, Sauvignon Blanc, and Pinot Noir wines.

The core customer is the discerning wine connoisseur who appreciates wines boasting superior taste and complexity. This core customer also appreciates and is loyal to brands that exude elegance. Duckhorn products are therefore premium priced, with most bottles in the high-double-digit to low-triple-digit dollar range at retail.

Duckhorn's products can be purchased from specialty or more upscale grocery stores, wine shops, and upscale restaurants. The company's wines are also featured at its own wineries and tasting rooms. Furthermore, Duckhorn Portfolio has an e-commerce platform where consumers can not only purchase directly from the company but can access detailed information about each wine, food pairing suggestions, and the ability to join wine clubs for exclusive access to limited releases and other special offerings.

Beverages and Alcohol

The beverages and alcohol category encompasses companies engaged in the production, distribution, and sale of refreshments like beer, wine, and spirits, along with soft drinks, juices, and bottled water. These companies' performance is influenced by brand strength, marketing strategies, and shifts in consumer preferences. Changing consumption patterns are particularly relevant and can be seen in the explosion of alcoholic craft beer drinks or the steady decline of non-alcoholic sugary sodas. The industry is highly competitive, with a diverse range of products from large multinational corporations, niche brands, and startups vying for market share. It's also subject to varying degrees of government regulation and taxation, especially for alcoholic beverages.

Competitors include Constellation Brands (NYSE:STZ), Treasury Wine Estates (ASX:TWE) and private companies Silver Oak Cellars and Opus One Winery.

Sales Growth

Duckhorn is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale.

As you can see below, the company's annualized revenue growth rate of 11.1% over the last three years was impressive for a consumer staples business.

Duckhorn Total Revenue

This quarter, Duckhorn reported a rather uninspiring 5.2% year-on-year revenue decline, missing Wall Street's estimates. Looking ahead, analysts expect sales to grow 11.1% over the next 12 months.

Volume Growth

Duckhorn's average quarterly volume growth was a robust 6.4% over the last two years. This is good because meaningful volume growth is hard to come by in the stable consumer staples sector. Duckhorn Year-On-Year Volume Growth

In Duckhorn's Q1 2024, sales volumes dropped 3.4% year on year. This result was a reversal from the 9.2% year-on-year increase it posted 12 months ago. A one quarter hiccup shouldn't deter you from investing in a business. We'll be monitoring the company to see how things progress.

Gross Margin & Pricing Power

All else equal, we prefer higher gross margins. They make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

This quarter, Duckhorn's gross profit margin was 52.5%. up 1.9 percentage points year on year. That means for every $1 in revenue, $0.47 went towards paying for raw materials, production of goods, and distribution expenses. Duckhorn Gross Margin (GAAP)

Duckhorn has great unit economics for a consumer staples company, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see above, it's averaged an impressive 51.9% gross margin over the last eight quarters. Its margin has also been trending up over the last 12 months, averaging 8.9% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).

Operating Margin

Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.

This quarter, Duckhorn generated an operating profit margin of 22.8%, down 4 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume the reduction was driven by operational inefficiencies and a step up in discretionary spending in areas like corporate overhead and advertising.

Duckhorn Operating Margin (GAAP)

Zooming out, Duckhorn has been a well-oiled machine over the last two years. It's demonstrated elite profitability for a consumer staples business, boasting an average operating margin of 24%. On top of that, its margin has improved by 2.8 percentage points on average each year, a great sign for shareholders.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q1, Duckhorn reported EPS at $0.13, down from $0.17 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.

Duckhorn EPS (GAAP)

Between FY2021 and FY2024, Duckhorn cut its earnings losses. Its EPS has improved by 19.4% on average each year.

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 23.2% year-on-year increase in EPS.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Duckhorn's free cash flow came in at $7.67 million in Q1, down 61.6% year on year. This result represents a 7.5% margin.

Duckhorn Free Cash Flow Margin

Over the last eight quarters, Duckhorn has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 2.1%, subpar for a consumer staples business. Furthermore, its margin has averaged year-on-year declines of 10 percentage points. We'll keep an eye on this as almost any movement in the wrong direction is undesirable given its already low free cash flow margin.

Key Takeaways from Duckhorn's Q1 Results

With a market capitalization of $1.18 billion, Duckhorn is among smaller companies, but its more than $21.18 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

It was good to see Duckhorn beat analysts' gross margin expectations this quarter. That stood out as a positive in these results. On the other hand, its revenue, operating margin, and EPS missed analysts' estimates, driven by worse-than-expected sales volume declines (3.4% decline vs 2.8% projected decline by Wall Street). Overall, this was a mixed quarter for Duckhorn. The company is down 4% on the results and currently trades at $9.8 per share.

Is Now The Time?

Duckhorn may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We have other favorites, but we understand the arguments that Duckhorn isn't a bad business. First off, its revenue growth has been solid over the last three years, and growth is expected to increase in the short term. And while its subpar brand reputation keeps it from exerting much influence over its consumers, its impressive operating margins show it has a highly efficient business model.

Duckhorn's price-to-earnings ratio based on the next 12 months is 14.7x. We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like Duckhorn, it seems to be trading at a reasonable price.

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