Costs catch up (VWE)
Vintage Wine Estates reported FQ3 EPS of $.05 vs. consensus of $.08 with higher revenues offset by lower margins. Revenue grew 68% with organic growth of 44% and acquisitions contributing the remainder, accelerating from 33% sequentially. Case volumes increased 22.4% for the quarter. Adjusted EBITDA of $14M was $1M below consensus expectations. Although revenue was better than expected margins were weaker due to supplier cost increases.
- DTC grew 33.5% with organic growth of 11% and volume growth of 67.3%. Growth was driven by increased traffic to the tasting rooms and acquisitions.
- B2B grew 205% with volume growth of 32.9%. The majority of the growth was due to increased custom production.
- Wholesale grew 16.4% with volume growth of 12.3%. Growth was due to acquisitions offset by lower off premise sales. Depletion volume growth was 2.4%. For the priority brands depletion volume growth was 7.5%.
Gross margins contracted 340bps due to higher supply chain costs on shorter notice. SG&A costs increased 47% and leveraged 490bps. Vintage Wine Estates’ recent acquisitions are generally dilutive to margins until synergies contribute. The company is raising prices by 3% in the current quarter to offset inflationary cost pressures. Beverage alcohol price increases have been the lowest of the CPI food categories. Management has not ruled out another price increase sometime after the current quarter.
Management raised revenue guidance from $275-285M to $290-295M. Adjusted EBITDA guidance was lowered slightly from $63-66M to $62-64M. The implied margin guidance is 150bps lower at the mid-point. The company has acquired four companies so far during the fiscal year for $90M.
Vintage Wine Estates’ robust revenue growth and organic revenue growth were best in class with modest price increases. With price increases offsetting the cost pressures this quarter and synergies from the recent acquisitions in the following quarters we have confidence in margins improving. Shares are attractively valued at 1.5x F2023 sales and slightly higher than 10x EBITDA. As management executes on their strategy and EPS grows at a 20% CAGR the valuation will reflect the opportunity to participate in the consolidation of the luxury wine segment.
Oat milk surcharge (STKL, SBUX, OTLY)
PETA staged a protest last week with James Cromwell, an actor best known for his roles in Babe and Succession, supergluing his hand to the counter of a Starbucks in New York City. He was protesting the $.70 surcharge on all plant milk options for prepared drinks. James Cromwell has been associated with PETA since he starred alongside pigs in Babe. An interfaith group of Christian, Hindu, Buddhist, and Jewish leaders issued a statement on Friday asking Starbucks to stop charging for vegan milk alternatives saying it amounts to a tax on people who have adopted plant-based diets. Others have said charging a surcharge is a racist policy because several races have high percentages of lactose intolerance. Starbucks dropped its £.40 surcharge for plant-based milks in the U.K. on January 5. SunOpta is a secondary supplier of oat milk for Starbucks and the supplier of most of the other plant-based options. Reducing the surcharge will increase the demand for SunOpta’s plant-based milks.
Abbott can restart (PRGO)
Abbott said it reached an agreement with the FDA to resume production at its suspended infant formula plant. The company said it would take between six to eight weeks before products from the plant reached retail shelves. The FDA is expected to announce additional steps that would allow more foreign imports. Meaningful levels of imports will take nearly as long as products from Abbott’s plant. Less fear of running out of infant formula should lead to less stocking up which has exacerbated the situation. Price increases will remain a tailwind for Perrigo’s store labels as consumers trade down. During supply shortages consumers are much more willing to try different brands.
