2023-09-28 09:37:01 ET
Summary
- The Duckhorn Portfolio's revenue increased by 28.3% and operating margin reached 24.9%.
- An increase in the share of revenue in the DTC segment and rising prices for the company’s products supported business profitability.
- Despite the strong results, I expect financial results in the coming quarters to be modest, so my recommendation is a hold.
Introduction
The Duckhorn Portfolio, Inc. ( NAPA ) stock has fallen 28% YTD. Since my previous publication , where I said that I did not see clear catalysts for growth in stocks, quotes have declined by 7.3%, while the S&P 500 Index (SP500) has shown a decline of 4%. In my article, I would like to analyze the company's financial statements and update my view on the company's shares.
Duckhorn Portfolio produces and sells wine. The company specializes in the premier luxury segment. The main sales channels are wholesale (81% of revenue) and DTC (19% of revenue).
Investment Thesis
Despite the fact that the company showed stronger financial results than I expected in my previous article , I still maintain a conservative view on the company's stock. First, I expect the company to continue to show modest revenue growth. Secondly, in line with management's own expectations and comments, I believe profitability levels will be under pressure in the coming quarters. Thirdly, the company's shares are still not cheaply valued according to multiples.
Q4 2023 (Fiscal) Earnings Review
The company reported better than investors expected . The company's revenue increased by 28.3% YoY , driven by a 17.7% YoY increase in prices and a 10.6% YoY increase in volumes. In terms of business segments, the largest contribution was made by the DTC segment, where revenue increased by 75% YoY. Thus, the share of revenue from the DTC channel showed an increase from 13.9% to 19%, while the share of revenue from the "Wholesale - distributors" and "Wholesale - California direct to trade" channels decreased from 67.2% to 65.1% and from 18.9% to 15.9%, respectively.
Price/volume growth (%, YoY) and revenue by segment (%) (Company's information)
Gross profit margin increased from 50.4% in the 4th quarter (fiscal) 2022 to 55.2% in the 4th quarter (fiscal) 2023 as a result of higher prices for the company's products, lower investments in prices, and improved performance in the wholesale segment. Expenses on SGA (% of revenue) decreased from 35.5% in the 4th quarter (fiscal) 2022 to 30.4% in the 4th quarter (fiscal) 2023.
Gross profit margin and SGA (% of revenue) (Company's information)
Thus, operating margin increased from 14.9% in the 4th quarter (fiscal) 2022 to 24.9% in the 4th quarter (fiscal) 2023.
Operating income margin (Company's information)
In addition, the company provided guidance for 2024 (fiscal year). Thus, management expects revenue to be $420-$430 million, while adj. EBITDA will be in the range of $150-$155 million. You can see the details in the graph below.
Guidance (Company's information)
My Expectations
Although the company's management says wine trends are showing early signs of recovery, I believe financial results will be modest in the coming quarters. Firstly, the company is currently focused on increasing market share, so the largest contribution to revenue growth, in my opinion, will continue to come from rising sales volumes , while I doubt that we will see support from increasing prices for the company's products. If we look at the company's guidance, which I wrote about above, we see that management expects modest revenue growth rates of 4.2%-6.7%.
We expect to realize volume-driven topline growth of mid-to-high single-digits. Net sales contribution will be balanced across our sub-channels and brands with a profitability growth consistent with the topline. So as we look forward, we do see our growth in 2024 to be primarily driven out of volume, because those price increases have really kind of, we're lapping those already within the quarter.
Additionally, I would like to highlight the fact that the company plans to increase its share of revenue through growth outside of California, where sales margins are slightly lower. Thus, in the coming quarters, I expect that we will see pressure on the company's gross margin level.
For fiscal year 2024, we anticipate downward pressure on gross margin of up to 50 basis points as we restore pricing to more normalized levels. On a full-year basis, our growth outlook is in line with our long-term growth algorithm and we remain prudently optimistic despite some potential industry and macroeconomic pressure.
Risks
Margin: Unfavorable channel mix, increased operating costs, and investments in prices due to increased competition may put pressure on the dynamics of the operating profitability of the business.
Macro (general risk): High inflation and a decline in real income may lead to a decrease in consumer spending in the discretionary segment, which may have a negative impact on the dynamics of business revenue growth in the future.
Valuation
Valuation Grade is C. In accordance with the P/E ((FWD)) and EV/EBITDA ((FWD)) multiples, the company is trading at 18x ??and 11x, which puts a premium to the sector median of about 4% and a discount to the sector median of about 1.5%. Despite the fact that the company's shares are currently cheaper than at the time of my previous article, I still believe that the current valuation does not look cheap, while I do not see any obvious catalysts/drivers for the stock's growth.
Conclusion
Thus, at the moment, my recommendation for The Duckhorn Portfolio, Inc. stock is hold. I expect revenue growth to continue to be low, while I don't see any room for improvement in profitability. In addition, the company's shares are still not cheaply valued according to multiples.
For further details see:
Duckhorn Portfolio: Strong Reports, Moderate Expectations