The Duckhorn Portfolio, Inc. (NYSE:NAPA) is the premier scaled pure-play producer of luxury wines sold for $15 or higher in North America. The company offers a curated and comprehensive portfolio of luxury wines with suggested retail prices ranging from $20 to $230 per bottle, available in all 50 states, the District of Columbia and over 50 countries under a world-class luxury portfolio of winery brands.

Business Overview

The Duckhorn Portfolio's business is comprised of two primary sales channels - wholesale and direct-to-consumer (DTC). The wholesale channel, which represents approximately 85% of net sales, includes sales to distributors both inside and outside California as well as direct sales to trade accounts in California. The DTC channel, which makes up the remaining 15% of net sales, includes eight tasting rooms, wine clubs and the company's e-commerce websites.

The company owns or controls, through long-term leases, certain high-quality vineyards throughout Northern and California and Washington. Vinification takes place at wineries owned, leased or under contract with third parties predominantly located in Napa Valley, California; Anderson Valley, California; Hopland, California; Hollister, California; San Luis Obispo, California; Sebastopol, California; Windsor, California; and Walla Walla, Washington.

Financials

For the fiscal year ended July 31, 2023, The Duckhorn Portfolio reported annual net sales of $402,996,000, annual net income of $69,298,000, annual operating cash flow of $70,092,000, and annual free cash flow of -$2,751,000.

In the third quarter of fiscal 2024, the company reported net sales of $92,532,000, up 1.4% year-over-year. Gross profit margin was 55.6%, up approximately 20 basis points compared to the prior year period. Adjusted EBITDA was $37,726,000, an increase of 5.3% year-over-year, with an adjusted EBITDA margin of 40.8%.

The company's performance in the third quarter was impacted by softer than expected demand in the wholesale channel, partially offset by strength in the DTC channel. Wholesale to distributor net sales declined 11% as the weaker demand environment was partially offset by growth in new accounts and labels per account. California wholesale direct-to-trade declined 7.3%, driven by the same factors impacting the out-of-state wholesale channel. The DTC channel increased 71.4%, reflecting the shift of the company's largest Kosta Browne offering into Q3 of fiscal 2024 from Q4 of the prior fiscal year.

Guidance and Outlook

For fiscal 2024, The Duckhorn Portfolio now expects full year net sales in the range of $398 million to $408 million, which represents a growth rate of approximately minus one to positive one percent. This guidance range includes approximately $16 million of anticipated net sales from the recently acquired Sonoma-Cutrer in the fourth quarter.

For adjusted EBITDA, the company expects a range of $146 million to $150 million, representing an adjusted EBITDA margin of 36.7% at the midpoint. The company expects interest expense of approximately $18 million and a tax rate between 27% and 29% for the full fiscal year. Adjusted EPS is expected to be in the range of $0.56 to $0.58 per diluted share.

Management cited the current market environment and softer than anticipated demand in the third quarter as the primary drivers behind the revised guidance. However, the company remains confident in its ability to continue outperforming the industry and deliver sustained profitable long-term growth.

Recent Developments

Acquisition of Sonoma-Cutrer

On April 30, 2024, The Duckhorn Portfolio completed the acquisition of Sonoma-Cutrer, a wholly-owned subsidiary of Brown-Forman. Sonoma-Cutrer is well-known for its luxury Chardonnay brand and owns six estate vineyards with approximately 1,100 acres in both the Russian River Valley and Sonoma Coast appellations.

The Closing Date purchase consideration to Brown-Forman, inclusive of preliminary working capital adjustments, was comprised of 31,531,532 shares of the company's common stock valued at approximately $267.1 million and $49.6 million in cash, funded from the revolver portion of the company's credit facility. The company estimates that an additional $0.8 million of cash consideration will be payable within 90 days of the closing date.

The company expects the acquisition to be accretive in the first full fiscal year based on estimated run-rate synergies of up to $10 million. The complementary nature of the Chardonnay-led Sonoma-Cutrer brand within Duckhorn's broader portfolio architecture is expected to allow the company to capitalize on incremental accounts and labels per account.

Distributor Network Realignment

Another key priority for the company is the recently announced distributor network realignment across the United States. This comprehensive strategic evaluation and realignment of the wholesale distribution network is expected to help fuel increased focus and investment in the Duckhorn portfolio of brands from the company's distributors.

The transition to the new network has already begun, and while the company anticipates some unevenness in the phasing of shipments and depletions over the next two quarters, the long-term benefits of improved execution and growth are expected to outweigh these short-term fluctuations.

Risks and Challenges

The Duckhorn Portfolio faces several risks and challenges, including:

1. Exposure to macroeconomic conditions and consumer demand trends: The company's performance is influenced by overall economic conditions and consumer spending patterns, which have shown signs of softness in recent quarters.

2. Reliance on wholesale distribution network: As an 85% wholesale-focused business, the company is dependent on its network of distributors, which can introduce variability in shipments and depletions.

3. Competition in the luxury wine market: The company operates in a highly competitive industry, with the need to continuously innovate and adapt to changing consumer preferences.

4. Grape supply and production costs: The company's cost of sales is impacted by factors such as annual grape harvest yields, grape and bulk wine market prices, and seasonal labor costs.

5. Regulatory environment: The company must comply with various federal, state and local laws and regulations related to the manufacture, sale and distribution of wine.

Despite these challenges, The Duckhorn Portfolio's strong brand portfolio, diversified supply chain, and focus on operational excellence position the company well to navigate the current industry environment and deliver long-term profitable growth.

Conclusion

The Duckhorn Portfolio is a leading producer of luxury wines in North America, with a diversified portfolio of well-established brands and a robust omni-channel distribution model. While the company is navigating near-term industry headwinds, its recent acquisition of Sonoma-Cutrer, distributor network realignment, and continued focus on operational efficiency position it for sustained profitable growth. With a strong balance sheet, the company is well-equipped to weather the current market conditions and capitalize on opportunities to further strengthen its position in the luxury wine segment.