WINE - Majestic Wine Plc

[whistlerbumps]

Couple of updates here.

 

1) Naked won best wine club from USA Today

 

The top 10 winners in the category Best Wine Clubs are as follows:

1. NakedWines.com

2. Wine of the Month Club

3. Underground Cellar

4. Plonk Wine Club

5. Firstleaf

6. Winc Wine Club

7. Through The Grapevine Natural Wine Club

8. Primal Wine Club

9. VINEBOX

10. Wine Access

A panel of experts partnered with 10Best editors to pick the initial 20 nominees, and the top 10 winners were determined by popular vote.

Congratulations to all these winning wine clubs!

https://www.10best.com/awards/travel/best-wine-club

 

2) Naked competitor WINC (#6 above) is looking to raise its Series D at a $110mln valuation which is 2.69x 2018 revenues.

https://www.modernretail.co/startups/why-winc-is-turning-to-equity-crowdfunding-to-raise-capital/

 

WINC roughly half the size of Naked and is growing more slowly but Naked  is valued at 0.67x FY 4/19 sales.  At 2.69x 4/19 sales, Naked would be worth ~650p per share plus the proceeds from the Majestic Sale (~100p). 

 

Not saying that WINC's valuation is right but there is a long way between Naked's implied valuation currently and the valuation of a weaker peer.

 

 

 

[peterism]

Thanks for posting this information!

[cameronfen]

Just bumping.  Anyone looking at this again?  I'm just revisiting and with Covid they have grown a lot and seem to have some scale where it looks like their virtuous flywheel seems to really be engaged: ROEs based on their (somewhat reasonable) proxy for steady-state earnings seem to be in the 20-30% range.  I think some other online wine clubs and sellers have grown faster during Covid and quite a few seem bigger in the US, but at scale the business model allows it to have more pricing power on both the winemaker side and customer side as many wines are exclusive to Naked, not to mention the negative working capital aspect of everything.  That being said I think the business model does cause confusion with customers as a visit to their BBB page reveals. 

 

New management seems somewhat overly optimistic.  I don't like them using customer retention numbers for their covid cohort based on covid customer retention.  Once covid is over these customers are likely less attached to the business than even pre-Covid customers at the very least.  At a minimum, they should be using pre-covid customer retention numbers, which will reduce their LTV I think (although I'm not entirely sure how that is calculated).  I also find it a little too optimistic to be highlighting a 20-year payback period.  I think Gromely focused on a 5-year payback period when calculating LTV.  20-year seems very aggressive, although I get that they are probably calculating using a geometric series based on customer retention. 

 

Just some thoughts.  Curious about other's opinions. 

[Edward]

I have an interest in this, so a few thoughts.

 

1. The X4 in 20 years metric is very bad from an investment perspective to track. Most of the return is front loaded, meaning they make back their investment in about 1.5 years and it slows down from there. A better way to look at it is in terms of ROIC which takes into account the front loaded nature.

 

I put their reported returns from recent presentations into a spreadsheet, and come up with around 50% ROIC. These are world class returns over here.

 

2. Coupled with a now high growth rate, this is just an incredible growth story as value is created by having BOTH high ROIC and growth.

 

3. Current Market Cap is around 400M, and I calculate standstill net profit at around 25M. A 17 P/E for an pretty amazing business is not something you find every day.

 

4. Management seem to be on top of everything important.

 

5. Their main competitive advantage is not the online approach (a la Amazon), nor it is direct marketing. It is their relationship with suppliers.

 

Amazon bleeds its suppliers dry and uses them as a form of float. Naked Wines are giving an amazing and unique deal to the suppliers - you make the wine, we will take care of everything else.

 

The wine maker no longer has to worry about a bunch of huge business problems - raising money to fund the business as it grows, selling the product, distribution and logistics. These are the main business killers and no winemaker wants to manage these, they want to make wine and be left alone.

 

Hence any winemaker working with Naked Wines should be ecstatic that they don't have to deal with the business BS anymore, and in my opinion that is their main source of competitive advantage.

 

Anyone can open a wine club and sell online. No one is really in the position of making a credible promise to suppliers like Naked does, as it takes years to cultivate trust and working relationships.

[Anglozurich]

In Spain there are families and winemakers that have been around for decades if not hundreds of years. They developed a brand and share of mind with consumers. They take a huge share of the market. Their brands are known in the UK. That means something. This type of moat is way more powerful than a moat in the form of an online networking effect this business is offering. If I am one of the Albarino families with a great brand developed over decades, I have the pricing power in the chain and the lions share of economics. I can choose what online channel i go through and may just mix and match. I can use Costco, Macro, Tesco, Waitrose, and all sorts of wholesalers to the trade. I also do not need your working capital as I have a balance sheet.....why?...because i have created a brand and im a business, not a mom and pop shop.

 

Why should there be so many independent winemakers? Is this independent winemaker story a bit like the IPA craft beer craze where independents are popular for few years, consumers lap it up but then ultimately the fad just dwindles, people dont want to drink 7% headache juice and the big beer brands with the marketing power, brand, local loyalty and share of mind win again. Is this company just financing headache juice to satisfy a temporary trend?

 

Not for me sorry. Cant see moat and its not that cheap.

[Edward]

I think craft beer and small wine producers are a nice niche in the market and has always been around. Some people like something new that's not another Heineken.

[ukvalueinvestment]

First, I have tried them out and am not that impressed.  Wine wasn't great, albeit heavily discounted.  And the website is very simplistic, although it could work for some I guess.

 

My main problem is on the moat.  Company has the vibe of helping the small artisan - it calls its customers "angels".  But how does this work as the company gets bigger and bigger?  At some point it will run out of these small artisans or someone else can copy the model.  For me to consider investing I would need to see as much financial metric disclosure on the supplier side as the buyer side to understand how much depth there is to that supplier base.

[aglittell]

I don't know how many independent winemakers there are but this is how I am thinking about it. First off, they are relatively concentrated in Northern California and are still able to service the current revenue growth. Expanding to different regions across the globe should increase the pool of winemakers considerably. This would also increase the value to consumers who wish to drink a variety of wines. The question then becomes do these winemakers have an incentive to join the platform. Maybe this is me regurgitating the company's self-defined value prop, but the current wine production and distribution system seems suboptimal for wine-producers and consumers. The producers take very little of the cost of a bottle of wine. If moving to Naked's platform can give them a larger piece of the pie, then I would expect them to make that shift, regardless of their geographic location. On their most recent IR deck, Naked share the story of two recent additions to the winemaker lineup - Matt Parish and Jesse Katz. Katz sold $250k in 24 hours and Parish did $350k in the first week. Obviously these two are cherry-picked examples by mgmt. But the average wine-producer on the platform is looking at a production alternative that can remove the working capital worries and guarantee to some degree, considerable sales.

[mikek]

I think Naked Wines is still extremely cheap. Market thinks they are just a covid stock. No question that Covid has accelerated the business a lot but I think they are running at around 43 million standstill profits for this year. They are 8 months into their year but I feel that will be the true number after these next 4 months. Market thinks a lot of these new clients will churn, obviously some will but Naked Wines in the US looks to have a long runway. The never miss out already has 180k people that have automatically reserved future purchases of wines they like. These are clients that have basically already pre-ordered your product.  The biggest change is the chart showing the new amount of people trying e-commerce for wine buying. I don't feel a lot of those are going back to the old way of buying wine.  430 market cap, no debt, 75 million cash - a lot of that is client money but it's basically float. The work from home trend has really helped the company since someone has to sign for the wine. Work from home trend isn't going back to how it used to be.

[thowed]

Also don't really understand this.  Certainly in the UK, it's rather a 'nuisance marketer' with unattractive leaflets all over the place.

 

There are so many wine sellers who have a decent online presence now - and you can choose to get a case of plonk from a supermarket, or a case of good stuff from Berry Bros or many other indie wine merchants - I usually just do a quick google to see who's doing the stuff I like the cheapest.

 

And I guess you have to think - do I believe that Naked will be able to source the best winemakers to participate, or are they doing their own thing independently.  If you want small-batch, then the 'cult wine' thing has been around for ages - getting your name on the Screaming Eagle waiting list etc.

 

Maybe it's different in the US growth-wise, but overall I don't get it.

[ukvalueinvestment]

the other thing to mention is that growth in the Uk seems to have slowed somewhat so what is so great about the US market?  I have heard that there is a particularly quirky regulatory regime around alcohol and Naked Wines has managed to get itself designated as a "producer" (rather than eg retailer) which enables a pricing advantage.  So key to the supply side and case I think is how replicable and scalable that status is.

[Edward]

the other thing to mention is that growth in the Uk seems to have slowed somewhat so what is so great about the US market?  I have heard that there is a particularly quirky regulatory regime around alcohol and Naked Wines has managed to get itself designated as a "producer" (rather than eg retailer) which enables a pricing advantage.  So key to the supply side and case I think is how replicable and scalable that status is.

In the US there are laws in many states that prohibit direct selling. You have to have 3 tiers - manufacturer, wholesaler, retailer. Naked goes around a few of those by designating itself as a manufacturer (winery) in some cases, in others they have a deal with a passive partner that gives them access as a flow through.

 

The US market has high pricing for many wines so margins are better for Naked. Also growth is higher as Americans are more used to buying online compared with the UK.

[ukvalueinvestment]

 

The US market has high pricing for many wines so margins are better for Naked. Also growth is higher as Americans are more used to buying online compared with the UK.

 

Is that statement about Americans being more used to buying online a general statement?  If so, I'm not sure if that's true.  I believe Uk is one of the most highly penetrated online markets in the world and - believe me - delivery wine clubs have existed for very many years.

[Edward]

Bad assumption on my part -

https://www.business.com/articles/10-of-the-largest-ecommerce-markets-in-the-world-b/

 

The UK has higher online retail share than the US. A bigger market though.

[Jurgis]

The work from home trend has really helped the company since someone has to sign for the wine. Work from home trend isn't going back to how it used to be.

 

"Someone has to sign for the wine" is a bad headwind IMO. Is that UK or US restriction?

It might be OKish during Covid, but it's quite a negative going forward even assuming some percentage of people will still work from home.

[Anglozurich]

Is this the last positive trading update as a WFH/lockdown trade? Very curious to see how this plays out from here. There is a strong case for significant churn in 2021 as marginal consumers redirect spend into the on-trade and £25 a month of wine (to be drank in the house) becomes less of an unmet need. I do not believe this is a priority subscription for a big chunk of who they see as angels. Strong hands required indeed in 2021/2022.

Edited April 15, 2021 by Anglozurich