Q1 2023 Duckhorn Portfolio Inc Earnings Call
With that said my focus remains steadfast on the quarters ahead of us and I plan to work diligently with Alex the rest of the executive team and my eventual successor to ensure a seamless transition.
Turning to our first quarter results and beginning with our topline net sales were $108 2 million.
A three 8% increase in organic growth compared to the prior year period.
These results reflect nine 2% growth in volume.
Continued execution in the on premise and off premise channels led to strong wholesale case growth, partially offset by negative five 4% price mix.
The decline in price mix was primarily a result of the previously discussed timing shift and the cost of brown shipment.
And to a lesser extent the continued outperformance of our leading corn vineyards and decoy winery brands relative to our other wine rebrand.
And as Alex noted earlier first quarter Depletions outpaced shipments as a number of key metrics a couch.
<unk> sold points of distribution and velocity per account.
All contributed nicely to our growth.
Yeah.
Lets focus for a moment on net sales performance by channel.
Wholesale distributor was our greatest contributor to growth, increasing 15, 8% versus the prior year quarter.
Both on and off premise, we're up double digits in the quarter once again, highlighting the strength of our portfolio and the consumers continued desire for our high quality luxury wines in all settings and.
In addition to our strong business fundamentals, we looked at the timing of shipments, particularly in October and believe our outperformance relative to internal expectations.
Flex some pull forward from the second quarter I will discuss this in greater detail shortly.
The California directed trade channel was up <unk>, 7% versus the prior year period.
Well this marks a moderation in trend I'd point out are challenging year ago comparison, as first quarter fiscal 2022 recognized a material benefit from California's substantial reopening as the pandemic subsided.
The direct to consumer channel was down 46, 3% compared to the prior year quarter.
This decline was entirely related to the Costa Brown DTC shipment timing shift that we've noted a few times on the call already.
To put this shift in context, if we excluded costa ground shipments from last year's Q1 performance.
DTC net sales would've grown nicely in positive territory underscoring solid performance in our clubs and our tasting rooms.
First quarter gross profit was $54 $7 million, an increase of $2 3 million or four 4% versus the prior year period.
On an adjusted basis gross profit grew to 55 million or four 2% compared to the prior year period.
This represents a 58% adjusted gross margin up approximately 20 basis points year over year as negative channel mix from a decline in our higher margin DTC business was more than offset by margin improvements within our.
Wholesale channels.
Total selling general and administrative expenses were up $2 $5 million or 10, 9% versus the prior year period.
The increase was in line with our expectations and driven primarily by increased growth investments to support the pursuit of our considerable wholesale distribution white space opportunity and continued execution against our overall long term strategy.
On an adjusted basis, which excludes transaction related expenses and noncash equity based compensation total operating expenses increased by $4 6 million or 25, 7%.
Net income was $19 8 million and diluted EPS was <unk> 17 per share compared to net income of $21 3 million and 18 cents per diluted share in the prior year period.
Adjusted net income came in at $20 5 million and adjusted EPS was 18 cents per diluted share compared to $23 5 million and 20 cents per diluted share in the prior year period.
Adjusted EBITDA for the quarter decreased six 4% to $35 7 million. This represented 33% of net sales compared to 36, 6% of net sales in the prior year period.
The reduction reflects planned growth investments in the quarter as well as the timing shift in Costa Brown DTC shipments out of Q1.
At the end of the quarter, we had cash of $5 $3 million and total debt of $206 $2 million, resulting in a leverage ratio of one six times net debt.
Okay.
Regarding our outlook, we are reaffirming our guidance for fiscal year, 2023, which calls for.
Net sales of $393 million to $401 million, reflecting approximately 5.5 to seven 5% organic volume led growth.
Adjusted EBITDA of $132 million to $137 million.
And adjusted EPS of <unk> 62 to 64 cents per share.
We are making a few updates to certain assumptions underlying our full year guidance, though namely interest expense and adjusted gross margin.
For interest expense given the continued rise in interest rates. We now expect approximately 13, five to $14 $5 million up from $11 million to $12 million previously.
To reflect our first quarter outperformance, we now expect adjusted gross margin for fiscal 2023 to be flat to down approximately 50 basis points, an improvement from our prior guidance of down 50 to 100 basis points year.
Over a year.
There are no other changes to our margin assumptions were.
We still expect planned pricing to cover inflation.
And a greater year on year contribution from our other winery brands on one hand, we will be offset by continued outperformance in growth from the duck corn vineyards and decoy winery brands on the other hand.
There are no changes to our strategic growth investment plans for fiscal 2023 or.
Our current set of investment should enable us to continue to execute against our multi year wholesale distribution opportunity and scaled profitably over time further expanding our competitive moat and cementing <unk>, leading position within the luxury wine industry for the long term.
Aside from the full year guidance offered on our last call. We also provided detailed quarterly net sales guidance, given our new delivery cadence for our ultra luxury high margin cost you Brown wines.
As we sit here today, we are on plan with Costco Brown shipments and remain confident that we can produce outsized growth embedded in our guidance for the second half both in wholesale and DTC and particularly in Q4.
That said and as we signaled in September variability in monthly wholesale performance can influence any given quarter, particularly during times of economic uncertainty.
Based on stronger than anticipated growth observed late in the first quarter. We do believe a portion of net sales outperformance was pulled forward.
As such we are tempering, our net sales growth expectations for the second quarter to up low to mid single digits from up mid to high single digits.
However, our guidance for the full fiscal year remains unchanged.
Overall, we are very encouraged by the first quarter and we look forward to continued success throughout fiscal year 2023.
I will now turn the call back over to Alex for closing comments.
Thank you Laurie we are off to a great start to the year and on pace to meet our fiscal year 'twenty three guidance, regardless of external factors, we are delivering strong results and executing upon our five strategic growth priorities.
First we are procuring ample supply of high quality fruit that meets the standard for luxury wines through our highly diversified supply chain.
We are leveraging our scaled omni channel platform to engage with consumers and continue to build brand awareness.
Third we are deploying our differentiated one stop luxury one shop sales approach to meet the fine wine needs of all trade partners fourth we are thoughtfully innovating to continuously refreshed the portfolio liberal exciting new offerings as a means to ensure strong consistent growth.
And fifth.
We are investing from a position of strength to drive sustainable penetration of our considerable wholesale distribution white space opportunity, which should support continued outperformance of the fastest growing sub segment of wine luxury as well as our long term target of high single digit organic net sales growth.
Look at highly attractive margins with that Laurie, Sean and I are available to take your questions.
If you'd like to ask a question. Please press star followed by one on your telephone keypad.
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Again to ask a question press star one.
As a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your question.
I'll pause here briefly is questions registered.
Yeah.
The first question is from the line of Kevin Grundy with Jefferies. Your line is now open.
Hi, This is Noah on for Kevin could you guys comment on trends you've seen more recently in October and November with Nielsen's, suggesting some slowdown as well as comment on general trends for premium wine in the category more broadly thanks.
Yes, sure I'll take that.
Think back a little bit just to look at.
That data is represents largely about one third of our overall business. So we need to take that into context.
The category is slowing a little bit we've all seen the same data so let's just identify that we continually.
Are progressing significantly higher than the category and the competitors within the categories. We feel we're in an advantaged position there and frankly, the three year trends are a lot more stable than the short term trends I just don't.
We can't look at two year trends and call. The industry. So we still are confident we're going to continue to outperform hit our hit our growth rates.
And in the state.
One of our competitors on that so I hope that gives a little context of how we're looking at it.
Uh huh.
Do you have a follow up on that.
No I'm good thank you guys.
Thanks.
Sure.
Thank you for your question.
The next question is from the line of Peter Galbo with Bank of America. Your line is now open.
Hey, guys good afternoon.
Congrats to Laurie.
Uh huh.
Thank you Peter.
Alex I found your comments on the on premise pretty interesting still at kind of a double digit depletion.
Even even with some of the slowness, we've seen particularly at the high end of our fine dining can you just kind of tell us what youre seeing because that would seem to break trend with a lot of the other data.
And I don't know if that's you guys have obviously taken a lot of share in the on premise or if it's more of that or if there's something else that youre seeing in that on premise business.
Peter.
We're seeing we're seeing success right. We've been we've been meeting with our customers where they wanted to be Matt the brands tastes good to price correctly.
We've been very aggressive in making sure we position ourselves with the right partners and our wines are selling so theres a confidence both on premise and off premise I think it applies equally.
We kept the investment up in our on premise sales teams throughout the us.
The pandemic. So we were really well poised when things came back to be front and center of our customers. We take that responsibility very seriously and I think what you're seeing is successes in that in that focus.
Great. That's helpful. And then maybe just as a follow up Alex.
Give you a little bit more time to talk about some of the innovation.
The canvas back in <unk>, when we might start to see that roll out more and in retail how you know how that much that's embedded in your growth plans. Now is is it incremental to this year or is it more of a fiscal 'twenty four event just any more color you can provide there thanks very much.
No.
Yeah, I wouldn't call no.
We try not to make silver bullets, we try to make a combination of really successful pieces to the puzzle. So you should expect to see those.
Impacts in the really in the second half.
And then continuing beyond that as we grow them.
They are not incremental to our plan we plan for them. We knew we were making them strategically made them. So they're not they're not outliers. There. They are embedded in the overall plan, but I think most of the impact this year will be second half and into the future.
And remember as you know we've talked about many times innovation keeps the keeps our customers excited keeps my employees excited it keeps the market excited so that is a justice innovation as a long term strategy to excite and bring up the average bottle price of our customers going forward. So this is just this is <unk>.
This year is the implementation of that.
Peter Hi, This is Lori I just my dad.
We've been releasing.
Sure.
Limited overtime several releases of of those varietals and we've seen great success with that and you know we when we release, a new wine, especially a wholesale one we anticipate it will take about three years to completely.
Be integrated and reach what were thinking as a point, where we won't be seeing significant year over year growth. So we continue to reap the benefits from these new product innovations for years into the future.
Great. Thanks, very much look forward to to train them.
Absolutely.
Yeah.
The next question is from the line of Andrea Teixeira from JP Morgan. Your line is now open.
Hey, this is truly an on for Andrea Thank you for taking the questions and Lori congratulations as well.
So I wanted to ask on the guidance clearly the first quarter came in better than expected and you noted some potential pull forward from October but on the other hand, I think Alex mentioned wholesale depletions were running high teens.
So I'm just curious.
Is there anything I mean.
I guess that would seem to suggest that.
Inventories are being.
Depleted faster so I'm curious why some more I guess conservatism on the second quarter.
Is there anything you're seeing from a consumer perspective, it didn't sound like that but just any more thoughts on on on the guidance there. Thank you.
Yeah.
Sure Yeah, So as you mentioned.
We are we did see for Q1 was a volume driven growth and we are estimating that about half of the outperformance is pulling into.
Q1 from Q2, so you know that the outperformance really was a function of <unk>.
Strong.
Direct to distributor Depletions, and then price as well so when we were originally doing our planning we were thinking our price increases which were really effective mid quarter that those would not really impact the quarter much at all we figured our distributors would bring in heavy prior to <unk>.
These changes taken in to effect and that's not what we saw we saw distributors buying at their normal cadence, we've seen depletions really exceeding our expectations and then the distributors really.
Ordering heavy towards the end of the quarter and that's what's giving us really the thought process that some of that pulled forward from what we had originally planned to ship in.
In Q2, so we're not seeing any decline.
A decline in demand.
At all we're seeing great.
As I said Depletions continue itself so no.
Concern at all from the pricing changes that we implemented.
And keep in mind that there is always some some level of variability in the timing of wholesale sales. So so we're cognizant of that just as Lorie mentioned as it relates to Q1 that can occur again in <unk>.
As we get to the border, but for the next Q2 into Q3, so we want to be cognizant of that and how we look at things.
Thanks, so much for the color and then just as a follow up on the California throughout the retail channel.
Not taking anything away from the performance, obviously against a tough comparison, but the three year did decelerate.
A bit in the quarter, obviously, a more developed market.
For corn, so just curious if there's anything else from a consumer perspective that youre seeing maybe in California.
Relative to the.
The rest of the United States.
Hey, drew that's a great question and I think we had reported this on some earlier Reportings, we had a bulk wine shipment of bulk wine sale built in to the quarter of the prior year.
Unusual we don't normally do a lot of bulk wine sales, but from time to time to manage quality. We will do that if you exclude that that's somewhat unique item we were up.
High single digits in the state of California, the largest wine consuming state in the Union. So just.
Just to put a clarifying point on that I think our results in California, We're really really healthy for the luxury bulk wine sales that were that were typically.
We do as our core business.
Yes.
Okay. Thanks, so much for the color I appreciate it and congratulate Laurie.
Thank you.
Thank you for your question.
The next question is from the line of Greg <unk> with Evercore. Your line is now open.
Hey, guys. Thank you for taking the call I was wondering if you could provide any more color on how you are thinking about the CFO search.
Internal versus external.
Just kind of any more color you can provide there. Thanks.
Yes, as you would expect first of all Lori is going to remain in the CFO position until we have hired someone has.
Been integrated so theres no.
Perhaps in anything so we're very confident with our full support and coverage until that time, we've hired a national.
A search firm.
And one of the significant items that when we're looking for is public company.
Experience solid public company experience.
US take this company for the next several years into the future. So I think we've covered all the important parts that we need and that the market is going to need from us.
Great and then just one other quick follow ups I saw on the press release that the underlying price mix without the impact from the cost of Brown shift was flattish is there anymore color you can provide I guess I know the tracked channel numbers had been around 2%.
Is that sort of what your.
What youre seeing and do you think that level of pricing is going to sustain through the end of the year.
Or do you expect that to kind of ramp or decline kind of based on the cadence that you have planned out.
Yeah.
Yeah, So Greg we don't really break out price separately from from brand.
So we have price mix, we did see in the quarter. So as we had anticipated.
But the DTC would impact our margins for sure and that's actually what we saw we didn't have our margins didn't decline to the extent that we thought they would mostly because of we experienced a little earlier benefit from the pricing changes then we.
Anticipated as I mentioned earlier and then also we had really strong brand mix, which helped offset some of that that we hadn't anticipated.
I think another point to take into account is that we've seen zero pushback on our pricing changes.
Into the first quarter and you know that the beginning of this fiscal year. So we're confident that we've made the right ones at the right time, and we do expect those to continue to flow through the.
Blow through the the performance for the year.
Great. Thanks, guys.
Thanks, Greg.
Thank you for your question.
The next question is from the line of combo.
<unk> <unk> with credit Suisse. Your line is.
Is now open.
Thank you everybody.
Lori congratulations.
And thanks for all your help especially around the IPO I don't I don't think any of US on this call are where that easy on you.
You managed it well I appreciate all the effort.
And so maybe I'll just start with a CFO question as well on margins I believe you said that you saw improving margins within specifically the wholesale channel can you maybe just talk about what's going on there and how you're kind of able to improve margins on.
That's part of the business and then maybe just some context on what the perhaps the spread looks like on.
California business versus your wholesale business.
Yes.
Well, what we saw as we.
We saw more sales in our wholesale channel than we had anticipated.
And what I was referring to with regard to the spread was more so that we had anticipated our distributors would bring in heavy prior to our price changes in the price changes were effective mid quarter.
We didn't see that behavior, we saw kind of business as usual.
But then we also saw heavier buying towards the end of October the end of our quarter. So we recognized greater benefit from that in the quarter than we had anticipated.
Yeah.
Recall, how we implement our pricing changes right way, we have multiple ways. We can do it one is through reducing trade spend and one is through changing our frontline price and so the majority of this this price change it was.
Was ample.
Implemented through changing our trade spend.
Oh got it okay.
Second.
Okay.
Go ahead.
Curious with it.
I was curious what it looked like the or what it looks like now.
The margin differential between your.
Directly to your California business versus your wholesale business.
Oh sure Yeah, so as.
As we then.
Talking for the past two years.
Hum.
Direct T, creating California's R is our second highest margin business write direct to consumer is the highest margin business. We have then within California went direct to trade is the second.
Highest margin and then the direct to distributor coming in third but then also remember as we talk about we.
We have different operating expenses across those three channels as well.
With a higher operating expense be.
And our DTC business.
Second being in California, because we have a lot lot more people outselling our wines.
Then with the other 49 states. So when it comes right down to contribution are quite similar in terms of contribution to.
To the bottom line between those channels.
Okay got it thank you.
Yes.
Thank you Carlos Thank you for your question.
There are currently no further questions registered so as a reminder, it is star one on your telephone keypad.
There are no additional questions waiting at this time.
I'll pass the conference over to the management team for any closing remarks.
Alright, I want to thank you again for joining us today to review, our first quarter performance and our updated outlook for the remainder of the fiscal year I look forward to speaking with you again in early March when we report our second quarter 2023 results and until then on behalf of the entire Dr. Corn portfolio I'd like to wish you a safe and happy holiday sees.
Take care and talk to you soon.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.