The Duckhorn Portfolio, Inc. (NYSE:NAPA) Q1 2024 Earnings Call Transcript

The Duckhorn Portfolio, Inc. (NYSE:NAPA) Q1 2024 Earnings Call Transcript December 6, 2023

The Duckhorn Portfolio, Inc. reports earnings inline with expectations. Reported EPS is $0.15 EPS, expectations were $0.15.

Operator: Good evening, ladies and gentlemen. Thank you for joining today’s Duckhorn Portfolio Q1 2024 Earnings Conference Call. My name is Tia, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call. [Operator Instructions]. I would now like to pass the call over to Ben Avenia-Tapper. Please proceed.

Ben Avenia-Tapper: Good afternoon and welcome to The Duckhorn Portfolio’s first quarter 2024 earnings conference call. Joining me on today’s call are Deirdre Mahlan, our Interim President and Chief Executive Officer and Chairperson; Jennifer Fall Jung, our Chief Financial Officer; and Sean Sullivan our Chief Strategy and Chief Legal Officer. I am a moment we will give brief remarks followed by Q&A. By now, everyone should have access to the earnings for the first quarter ended October 31, 2023, that went out at 4:05 PM Eastern Time. The press release is accessible on the company’s website at ir.duckhorn.com. And shortly after the conclusion of today’s call, a webcast will be archived for the next 30 days. Before I begin, I would like to remind you that today’s discussion contains forward-looking statements based on the environment as we currently see it, and as such, includes risks and uncertainties.

If you refer to Duckhorn’s earnings release, as well as the company’s most recent SEC filings, you will see a discussion of factors that could cause the company’s actual results to differ materially from these forward-looking statements. Please remember, the company undertakes no obligation to update or revise these forward-looking statements in the future. We will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspective on the underlying growth trends of the business and have included in our earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. In addition, please note that all retail scanner data cited on today’s call is according to Circana which was formerly known as IRI.

And we will refer to dollar or unit consumption for the 12-week period ended October 29, 2023, and growth versus the same period in the prior year in U.S. tax channels, unless otherwise noted. With that, I will turn the call over to Deirdre.

Deirdre Mahlan: Thank you, Ben, and good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2024 financial performance. Following my opening remarks, Jennifer will walk us through our quarterly results and our fiscal year 2024 financial guidance. We are pleased with our execution on the quarter, as we delivered top and bottom-line results at the higher end of our expected range. Net sales were $102.5 million in the quarter, and adjusted EBITDA was $34.7 million, for an adjusted EBITDA margin of 33.9%, a 90-basis point improvement over the prior year, driven by gross margin improvement and active management of operating costs. Due to some signs of softening in consumer sentiment and luxury wine trends, we now expect net sales to come in at the lower-end of our previously announced guidance range.

Accordingly, we are narrowing the net sales guidance to $420 million to $427 million, which reflects an annual growth rate of 4% to 6%. This reflects our expectations for continued share gains, albeit adjusted for a near-term lower industry growth rate. Despite this reduction in our top-line outlook, we expect to maintain our previously communicated adjusted EBITDA margin, as we manage our spending to account for this revised sales outlook. This translates into a range of $150 million to $153 million in adjusted EBITDA for the fiscal year. It is important to note the climate within which we are delivering this full-year growth. According to Circana, growth in total wine softened, as did the Luxury Wine segment defined as $15 and above. In the last 12 weeks, the Luxury Wine segment was flat and total wine overall declined 1.6%.

While we cannot control the macro environment, which has been mixed, the Duckhorn Portfolio brands have continued to demonstrate relative strength in their respective peers. We are confident in our comprehensive strategy and have a track record of profitable sales growth through a variety of industry climates. Our initiatives to support our strategy remain leveraging our brand strength, evolving our portfolio, expanding our wholesale network, and growing our DTC channel. I will now share some of the highlights from the quarter, driven by strong execution on our initiatives. Net sales were down 5.2% at the higher-end of our expectations for a first quarter decline of mid to high single-digits. This outperformance was partially driven by timing, as some shipments anticipated for November came in earlier-than-expected and shifted into Q1.

As we shared on our last earnings call, in Q1 we lapped a unique first quarter of fiscal 2023. Last year’s first quarter was marked by strong buys in wholesale as distributors and retailers alike placed unseasonably large orders, specifically for our higher priced Duckhorn wines. The result was an all-time high for quarterly net sales, driven entirely by volume. Accounting for this challenging comp, we continue to see our wholesale performance ahead of the broader market, demonstrating our brand strength. It is worth noting here that, we have always managed this business for the long-term, and quarterly variability is normal in this sector. Volume trends are affected by a number of factors in the supply chain, as distributors and retailers adjust the demand signals and manage inventory levels accordingly.

The full-year guidance Jennifer is discussing today is consistent with our objective to deliver profitable growth over the long-term. On the direct-to-consumer side, net sales declined 10.8% in the quarter, partially driven by a reduction in event revenue due to planned renovations at some of our tasting rooms. There is opportunity for improvement for our DTC business, which is one of our five key growth drivers. Our Q1 results are emblematic of broader post-COVID trends in consumer behavior. Across Napa Valley, hotel occupancy rates have dipped, but room revenue has continued to grow as strong demand at the highest end has buoyed average room rate. We’re actively adjusting our DTC approach to respond to changing consumer behavior and tap into the strength at the ultra-high end, and we’re seeing some positive results.

For example, although a number of visitors and spend per visitor were soft in the quarter, we’ve seen a strong response to our elevated tasting experiences where spend per person can be considerably higher than our traditional tasting program. From a total volume perspective, Q1 declined 3.4% in line with expectations. Shipments to wholesale declined 3% in the quarter while depletions declined at a slower rate. Wholesale inventories remained at a healthy level and in line with our expectations. While days on hand ticked higher year over year, this was primarily driven by lower than ideal levels during the peak selling season last year. Drilling down within our portfolio, we see performance slightly ahead of the industry overall with some areas of particular strength, including Decoy Limited, which had great success expanding into Merlot.

The evolution of our portfolio is another important growth driver as we leverage our carefully curated collection of luxury wines across a range of price points and taste profiles. While retail sales for the total wine category decelerating in the last 12 weeks, the $15 to $25 segment outperformed Decoy was soft at this price point during the period as the brand absorbed recent price increases and elapsed an unusually strong quarter in the prior year. The impact was mainly in the red varietals as Decoy whites grew ahead of the sub-segment in this period. We remain confident in the brand’s ability to distinguish itself from direct competition within its tier. Our higher price Decoy Limited, as I mentioned, demonstrated continued strength in the quarter with double-digit retail sales growth, and we view this as another proof point that consumers remain willing to pay for luxury wine.

Overall, our market share remains consistent. From a channel perspective, despite a challenging environment, we were pleased to report that our account bases increased in both the on-premise and off-premise channels of the business. We believe this to be testament to the strength of our brands and the confidence of the retailers to take stock in our wine, as well as the distributor and sales team efforts in achieving our goals of addressing the distribution opportunities in the marketplace. To conclude our portfolio of brands performed well in what has proven to be a challenging market environment. While our execution and the strength of our brands partially insulates us from a broader consumer sentiment, we are not immune. Reflecting this climate, we now expect net sales to come in toward the lower end of our guided range, which we are tightening to $420 million to $427 million, or 4% to 6% year-over-year growth.

We expect to maintain an adjusted EBITDA margin consistent with our prior communication as we carefully manage our expenses. With that, I’ll turn it over to Jennifer to provide more details on the financial results for the quarter and our outlook for the year.

Jennifer Fall Jung: Thank you, Deirdre, and good afternoon, everyone. As Deirdre described, we’re off to a good start to the year and believe we will continue to outperform the market as we leverage our strong portfolio of luxury wine brands. Beginning with our top line, net sales were $102.5 million, a decrease of 5.2% compared to the prior year period at the high end of the expectations previously communicated. As some shipments expected in November, came in earlier than expected shifting some net sales from Q2 to Q1. We managed through a modest mix headwind due to shipment timing from higher priced and greater than expected non-Decoy wine shipments in the year-ago period. By channel, the wholesale two distributor channel declined 5.4% in Q1, absent last year’s shipment timing impact, we estimate wholesale net sales growth was flat to slightly down year-over-year.

We remain committed to our wholesale strategy to expand accounts and points of distribution to ensure strong programming is in place to support our brands. Distributor days of inventory on hand remain healthy and in line with our expectations at 65 days, California wholesale direct-to-trade declined 7.3% compared to the prior year period, driven by the same factors that impacted wholesale to distributor. The tough comp due to a surge in buying in Q1 of last year was a nationwide trend and California was no exception. The direct-to-consumer channel was down 10.8%. We do see signs that our strategy to drive our direct-to-consumer business through customer engagement in our tasting rooms is working as our per-person spin remains high. As Deirdre mentioned, we’re navigating a changing landscape in multiple facets of the D2C business, but we’re confident in the initiatives we have in place, particularly in the elevated tasting experiences.

Moving down the income statement, first quarter gross profit was $53.9 million, or a gross margin of 52.5% up approximately 190 basis points year-over-year, driven by improvements in the wholesale channel related to our efforts to optimize trade spend, as well as easing input cost inflation as it relates to cost of goods. The DDC channel from margin contraction of 60 basis points, primarily driven by mix and timing. Operating expenses were $30.5 million, and increase of $4.7 million or 18.4% year-over-year. On an adjusted basis, total operating expenses decreased $0.2 million or 1% driven primarily by careful cost management. This excludes $2.7 million of transaction costs related to our pending acquisition of Sonoma-Cutrer Vineyards. Net income was $15.5 million or $0.13 per diluted share.

Adjusted net income was $17.2 million or $0.15 per diluted share. Adjusted EBITDA was $34.7 million, a decrease of $1 million or 2.7% year-over-year. Adjusted EBITDA margin improved 90 basis points versus the prior year period. The improved margin was driven primarily by lower trade spend, partially offset by lower net sales in the quarter. At the end of the quarter, we had cash of $21.2 million and total debt of $241.3 million, resulting in our leverage ratio of 1.7 times net debt. I’ll now share our updated full-year fiscal 2024 outlook, which does not include our recently announced plans to acquire Sonoma-Cutrer. Net sales in the range of $420 million to $427 million, which represents growth of 4% to 6%. Adjusted EBITDA in the range of $150 million to $153 million, also a 4% to 6% growth and a margin at the midpoint of approximately 35.5%, consistent with our previously communicated guidance.

For adjusted EPS, we expect a range of $0.67 to $0.69 per diluted share. I also want to provide some color on what we expect to see in the second quarter. As previously mentioned, a portion of shipments expected for November occurred earlier-than-anticipated. This, in addition to a softer consumer environment, contributed to our revised expectations of low single-digit net sales growth in the second quarter. Overall, we are pleased with our first quarter results. We remain in an advantageous position within our industry, and while there is some uncertainty in consumer sentiment broadly, we remain confident in our ability to take share, as we continue to outperform the broader wine industry. I will now turn it over to Sean for some notes on the M&A front.

Sean Sullivan: Thank you, Jennifer, and good afternoon. Earlier this quarter, we announced a landmark acceleration in our long-term strategic plan. We believe the acquisition of Sonoma-Cutrer which is expected to close in spring 2024, subject to customary closing conditions, will deliver significant shareholder value and provide a keystone in our strong foundation of future growth. As we have previously shared, disciplined acquisition of complementary winery brands are an important element of our growth strategy and part of our history. Sonoma-Cutrer is an outstanding addition to our portfolio of wine and central to this strategy for growth of the premier luxury wine portfolio in America. I would like to take a moment to reinforce a few of the key elements of the agreement to acquire Sonoma-Cutrer vineyards from Brown-Forman for approximately $400 million.

Sonoma-Cutrer is one of the largest and most celebrated luxury chardonnay brands in the United States and we are delighted to welcome this claimed winery brand into our portfolio. Preparations for closing are on-track and we expect to close in spring of 2024, as we discussed last month. We see meaningful wholesale distribution opportunities for Sonoma-Cutrer. We are excited about the prospect of offering Sonoma-Cutrer to Duckhorn accounts that don’t currently carry it, and also about introducing Sonoma-Cutrer on-premise and off-premise accounts to complementary wines in the Duckhorn Portfolio, including wines such to our Decoy Cabernet Sauvignon and Duckhorn Vineyards Merlot, which will be exciting new varietal offerings for legacy Sonoma-Cutrer account in with Duckhorn does not have a presence.

We will in touch over the next few months, for some more detailed review of the account penetration and distribution white space of Sonoma-Cutrer. One of the benefits of using our stock as the primary element of consideration for this acquisition is that, it affords us flexibility and optionality for future growth, which is specifically important to us in the current high interest rate environment. The structure also allows us to bring the experience and strategic guidance of Brown Foreman to our company as a long-term focus shareholder and through the two members of our board who will be affiliated with Brown Foreman. We view Brown Foreman as a partner, invested with us in the successful integration of Sonoma Cutrer, and committed to our shared mission to set the standard for American Fine Lines.

Delivering an accretive deal for our first public company brand acquisition was paramount in our evaluation of Sonoma-Cutrer, we estimate Sonoma-Cutrer adjusted EBITDA margin profile to be similar to the margin profile of the Duckhorn portfolio, which was approximately 35.9% in fiscal year 2023. The low single-digit adjusted EPS accretion that we project to be realized starting in fiscal year 2025, which is just a few months after the anticipated closing of the deal, will be driven by $5 million of already identified SG&A synergy. During our work preparing for integration, we are keenly focused on, on identifying additional sources of efficiency and synergy. Separately, we believe there are a number of opportunities for incremental revenue growth beyond the current growth of the brand, including cross selling opportunities in existing Duckhorn portfolio accounts and vice versa, as well as expanding Sonoma Cutrer’s footprint in the DTC channel through a heightened focus on the wine club and an enhanced experience for guests at the tasting room.

Areas where we can draw on our extensive expertise to augment growth. Additionally, we see significant opportunities to promote Sonoma-Cutrer brand awareness with consumers, which we believe will be a key driver of velocity and sales of these wines. And we also believe there are several incremental medium-term opportunities to manage Sonoma-Cutrer’s fruit sourcing and production models, optimize our company’s mix of estate grown and grower fruit, and pursue value enhancing land optimization opportunities. We look forward to keeping in touch with you about the preparations for closing and our plans for the future of Sonoma-Cutrer over the next few months. With that, I’ll turn the call over to Deirdre for her concluding remarks.

Deirdre Mahlan : Thank you, Sean. I’ve been closely involved in the evaluation of the Sonoma-Cutrer opportunity. First as a member of the board and now as CEO, and I continue to be excited as I learn more about the brand and the opportunities it brings to the Duckhorn portfolio. Two things couldn’t have been clearer. First, we are acquiring an incredible asset that is a great fit with our brand architecture. And second, the Duckhorn portfolio has an amazing team in place to make this integration of success. We have a proven track record through the acquisitions of both Calera and Costa Brown and have significantly expanded our in-house production capability with the recent acquisition of the Geyserville Production Winery. As a company, we are focused on continuing to identify thoughtful synergies and the successful integration of Sonoma-Cutrer into our portfolio and look forward to the strategic, commercial, and financial benefits it will provide over the coming years.

With that, I’ll close by saying, I see ample evidence to give me confidence in the strength and resiliency of our brands. We will continue to leverage our advantage position within the luxury wine space to drive growth and take share through the remainder of fiscal 2024 and beyond. We remain committed to delivering sustainable profitable growth and will always strive to create value over the long term for our shareholders. In keeping with that goal, we are excited to welcome Sonoma-Cutrer into our portfolio, and we look forward to making the acquisition official in spring 2024. Before I move to questions, I’ll provide a brief update on our ongoing CEO search. I’m happy to say that the board is pleased with the candidates it’s been seeing and the process is going as planned, and I look forward to keeping you updated as the process progresses.

With that, Jennifer, Sean, and I are available to take your questions.

Operator: [Operator Instructions]. First question comes from the line of Lauren Lieberman with Barclays. Please proceed.

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Q&A Session

Lauren Lieberman: So, just kind of my numbers could be wrong, but I think with the updated guidance and particularly the 2Q comments, it still implies very strong growth in the back half of the year. Something like a double-digit rate. So, I know there was a bit of pull forward this quarter from November, but I don’t, it just strikes me that it wasn’t large enough to account for what seems to be implied much healthier growth in the back half. So, we’re just hoping for some perspective on that anticipated acceleration. Thanks.

Jennifer Fall Jung: Thanks for the question. I appreciate it. This is Jen. Yes, so the back half is differentiated from the first half. So, what we have going on in the back half of the year is twofold. Really, there’s some innovation. We launched Decoy Limited in fiscal ‘23 in the back half, but due to the strong success, we quickly got low on inventory. And so, the first half of this year, we’ve been really limited on our, no pun intended, on our Decoy Limited inventory. But we will be back in stock towards the back half of the year. In addition, from an innovation perspective, we are launching our low Alk Decoy Sauvignon Blanc, which, will be a first launch of that in the back half. And then finally we’ll be back in stock in our Duckhorn Chardonnay, which has been performing very well for us.

Lauren Lieberman : Okay. Alright, thanks. And just in terms of the note, have you test marketed that, just kind of curious because it’s a really interesting category of course, but the range, frankly, of like hits and misses. It’s my sense is a lot of the wines aren’t quite getting there yet in terms of taste profile. So, have you had the opportunity to test market this? Because it, I’m curious how much of that is a driver of that second half acceleration?

Sean Sullivan : Hey, Lauren, it’s Sean. We’re very excited about Decoy, featherweight, which will be as Jennifer mentioned an offering in the second half of the year. I can assure you our wine making team, as always is very excited to stand behind everything that bears a Duckhorn portfolio name. And so, all of our wines, including the featherweight, go through a rigorous committee tasting process and we’re very excited about what we think consumers will view this wine in the second half when it’s released.

Deirdre Mahlan: Lauren, let me just add, this is dere. Let me just add one more thing to that. I think, over time, people learn about innovation and how best to balance anticipated consumer demand with supply. And I think, while, Sean is absolutely right that, we are excited about it, and we think it is a winner from a taste profile point of view. However, we are also, and prudent in terms of what we are planning for it in the back half. So, I would not call it out as the driver of what is going to get us to that growth in the back half, because we understand it will take time to build some distribution. And we will have to wait and see if the consumer loves it as much as we think they will. So, I wouldn’t say that, that is the driver of…

Lauren Lieberman : It is a contributor.

Jennifer Fall Jung: It’s a contributor, but it is not the only thing that is delivering that increase.

Lauren Lieberman : Okay, great. And then so therefore, having the inventory on the Duckhorn Chardonnay and the, is it a Decoy Merlot?

Jennifer Fall Jung: Yes, limited.

Lauren Lieberman : They are all good visibility.

Jennifer Fall Jung : Yes. They are all contributors. And also, I think we have a balanced view with respect to the overall performance of the industry in the back half. I mean, I understand that, and we understand there is a lot of cautiousness right now about the consumer. And we share that, which is why we tightened up our guidance. With that said, we do expect there to be growth in the back half.

Lauren Lieberman : Okay. Does the second half assume an acceleration in category growth, or no, this is much more availability of two key products kind of setting it?

Jennifer Fall Jung: I’d say that, it assumes a range of outcomes in terms comes in terms of what’s happening in the category. So, for example, if you even look at Circana data in November, it is better than it has been. And in fact, our brands in the four weeks in November were in growth during that period. But every month, of course, is an individual month and not something that we would take as an indicator of the future. But what we are doing is, so if the consumer comes back stronger, we would expect to be at the higher end of that range. And if we kind of continue to see, the trends we see now will be at the lower end.

Operator: Thank you. The next question comes from the line of Kaumil Gajrawala with Jefferies. Please proceed.

Kaumil Gajrawala: Thanks for letting me ask a question. Can we talk a bit more about the category and category softness? In the past, we heard a lot about resilience, particularly in the high-end piece of the line business. And then it looks like in this instance, any incremental distribution gains weren’t able to offset anything happening to the category?

Jennifer Fall Jung: So basically, what we saw in, our Circana data for 12 weeks, it’s been flat within the wine industry as a whole. And then, on a 52-week basis, it was actually up. So, we did see some slowing in the $15 and above category. Within the past 52 weeks that we did outperform the industry, what you saw a little bit in Q1 is because we were lapping such a strong quarter last year, we didn’t outperform the industry so much. But as we now have that behind us, we anticipate we will continue to outperform where the industry has been.

Kaumil Gajrawala: I see. And the industry itself, is it trading down or maybe just buying less?

Jennifer Fall Jung: The industry we see no signs of the industry trading down. In fact, in November, the $15 plus performed, while still it declined slightly less than 1% the industry as a total decline 2%, and our brands grew. So, I think across our portfolio in the industry, there really isn’t an indication of trading down. In fact, the success of our Deploy Limited, I think is a demonstration of that which is growing in strong double digits can on distribution gain and on rate of sale. I think we’re getting both on Decoy Limited. It’s a very strong performer and at a higher price point than our other Decoy labels. So, we are not seeing a sign of trade down.