Last week, Naked Wines (LSE: WINE) reported a loss for the first half of this financial year and announced that its CEO will be stepping down at some point in 2020. This left a bad taste in investors’ mouths.
It may seem that the business has lost its sparkle as this new loss follows a £10m loss for the last full year. But, before we pour the rest of Naked’s shares down the sink, let’s remind ourselves that the business has been and is changing.
Out with the old
Majestic Wines was a bricks and mortar retailer and wholesaler of wine, with an online channel. It also owned a fine wine merchant called Lay & Wheeler. Majestic bought Naked Wines, a 100% online operation, in 2015, got a taste for its robust profit growth, changed its name to Naked Wines (but kept the superb WINE ticker), and this year announced the sale of everything that used to be Majestic Wines.
Naked Wines will receive £111m for the sale of the old Majestic assets, which include a retail business with average annual revenue growth of 3% over the last three years, and a wholesale operation that saw revenues shrink by 1% on average over the same period. Although the fine wine business delivered nearly 12% revenue growth, it represented just 3% of group revenue and has also been sold.
In with the new
So now the focus is on Naked Wines alone, which has delivered 17% revenue growth and which made up 35% of revenues in the last full-year results. It is not going up against other retailers and competing on price. It is a semi-subscription business and subscribers crowdfund 200+ independent winemakers across the world. Naked Wines positions itself as the only intermediary between the drinker and the maker of wine, which keeps the costs to subscribers close to wholesale. You don’t need to be a subscriber to order wines that may not be available anywhere else, but you don’t get the big discount.
The new CEO was behind the online Naked Wines brand drive into the US, where revenues have grown by nearly 24% over the last year. The old CEO founded Majestic as a more traditional retailer, and so the switch makes sense given that Majestic is gone now, and the future is Naked.
Proceeds from the sale will strengthen the balance sheet and be deployed in the acquisition of new subscribers, which should help soften the impact of operations now being free cash flow negative. I personally don’t mind this cash burn, since it is being used to acquire future revenue: near 80% of new customers are retained and they pay back 70% of the investment needed to acquire them in the first year.
Vintage year
Those half-year results may not have looked good, however, they suffer from a stock build going into peak season and are distorted by the pending disposal. On a constant currency basis, revenues from the online business alone have covered variable costs enough to contribute more than fixed costs and leave a positive operating profit for the last four years.
I think to dump the old retail and wholesale operations was the right thing to do. Focusing on the unique online proposition and adding customers there is the right thing to do: there is a path to profit for Naked Wines.
