The Duckhorn Portfolio Bets On Premiumization Of U.S. Wine

A Quick Take On The Duckhorn Portfolio

The Duckhorn Portfolio (NYSE:NAPA) reported its FQ2 2023 financial results on March 8, 2023, beating revenue and EPS consensus estimates.

The firm sells a variety of premium-quality wines in North America and overseas.

While it may be somewhat insulated from a macroeconomic downturn by its focus on the premium wine segment, I’m concerned about the downward trend of its earnings profile.

I’m on Hold for NAPA in the near term.

Duckhorn Overview

Saint Helena, California-based Duckhorn was founded to own vineyard production facilities and produce premium quality wines, originally bringing the Merlot varietal to prominence.

Management is headed by president, Chairman and CEO Alex Ryan, who has been with the firm since the early 1990s when he started with the firm as Vineyard Manager.

The firm sells its wines direct-to-consumer as well as through a network of wine distribution companies in the U.S. and abroad.

Duckhorn operates under at least ten different wine brands and sells both through a direct-to-consumer model and through retail accounts and the above-mentioned distributor network.

Duckhorn’s Market & Competition

According to a 2020 market research report, the global wine industry was an estimated $327 billion in 2020 and is forecast to reach $434 billion by 2027.

This represents a forecast CAGR of 4.2% from 2020 to 2027.

Also, the Still Wine segment is projected to reach $167 billion and grow at a similar CAGR of 4.2%.

Notably, the Sparkling Wine sector is expected to grow at a faster 4.8% CAGR through 2027.

Major competitive or other industry participants include the following companies:

• E&J Gallo

• Constellation

• Trinchero

• Jackson Family Wines

• Ste. Michelle

• The Wine Group

Duckhorn’s Recent Financial Results

• Total revenue by quarter has grown per the following chart:

• Gross profit margin by quarter has trended slightly higher:

• Selling, G&A expenses as a percentage of total revenue by quarter have also trended slightly higher, a negative trend:

• Operating income by quarter has fluctuated within a range:

• Earnings per share (Diluted) have trended slightly lower:

(All data in the above charts is GAAP)

In the past 12 months, NAPA stock price has dropped 19.4% vs. that of the Consumer Staples ETF’s (XLP) drop of 1.5%, as the chart indicates below:

As to its FQ2 2023 financial results, total revenue rose only 4.9% year-over-year and gross profit margin grew by a notable 3.2 percentage points.

SG&A expenses as a percentage of revenue have trended higher while operating income has broken out of its historical range.

Earnings per share have been trending lower in recent quarters.

For the balance sheet, the firm finished the quarter with cash, equivalents and trading asset securities of only $7.9 million and total debt of $226.9 million.

Over the trailing twelve months, free cash flow was $34.4 million, of which capital expenditures accounted for a hefty $33.7 million. The company paid $5.6 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Duckhorn Portfolio

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming generous DCF parameters, the firm’s shares would be valued at approximately $11.07 versus the current price of $14.89, indicating they are potentially currently overvalued, with the given earnings, growth, and discount rate assumptions of the DCF.

Future Prospects For Duckhorn Portfolio

In its last earnings call (Source - Seeking Alpha), covering FQ2 2023’s results, management highlighted demand growth for its luxury wines and depletion growth exceeding shipments during the quarter.

Notably, management asserted that the luxury segment ‘remains the fastest growing sub-segment in wine’, so they believe the company is well-positioned for further share gains in dollars and volume.

The firm also saw 60% growth in its DTC channel, according to its expectations for the quarter.

Looking ahead, management raised fiscal 2023 guidance for revenue growth of 7.8% at the midpoint of the range and adjusted EPS of $0.64. Adjusted excludes stock-based compensation and one-time items.

Regarding valuation, my discounted cash flow calculation, which assumes fiscal 2023 adjusted EPS of $0.64, suggests the stock may be pricey at its current level.

The primary risk to the company’s outlook is the potential for a macroeconomic slowdown ahead.

While the firm’s focus on luxury wines may insulate it somewhat from the worst effects of a downturn, I’m concerned about the downward trend of its earnings profile.

Given the risks, my outlook on NAPA is on Hold in the near term.

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