Chit Chat Stocks - Naked Wines (WINE) | Fundamental Analysis

Episode Date: January 24, 2021

Naked Wines operates by selling wine through a subscription service. Formerly known as Majestic Wine, Naked Wines partners directly with the wine producers in order to bring customers lower prices and bring producers, consistent customers. As always, enjoy the show. Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Subscribe to us on YouTube: https://www.youtube.com/c/ChitChatMoney Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Chit Chat Money Sunday episode and this is where we cover a stock in about 20-25 minutes. It's called the Fundamental Analysis Show and today we're going to be talking about Naked Wines, a company that a lot of consumers in the United States may

be familiar of, but the stock not so much. But first, we're going to talk about our friends at 7investing as always, right? And we want to highlight every one of their advisors and today We're going to be doing Dan Klein. He came on a little bit later, I think this summer or maybe this fall. And he is the host of all their shows that they do. But he's also one of the lead advisors. So how would you describe his style? I mean he is – first of all, he invests in companies that everyone understands.

And maybe that's just the ones he presents when he's come on the show. But companies like Target, companies like Disney, he has a really good, I think, eye into what the consumer likes and that's sort of his niche i'd say and then he's also very personable and he really is a good he's like the most he's an incredible stage presence is what it feels like yeah he's good and he's good at explaining why he's investing in things i mean we were doing an interview with him and his cat came across the screen and he didn't even flinch which is exactly why you should take his stock recommendations but no and seriously in all seriousness. He's very straightforward. And I mean, if you're the type of investor that is

kind of a Peter Lynch style, I mean, that's right up your alley. But before we get started, we got to talk about using our code CCM at checkout at 7investing. You get $10 off your first month. So you can try it out for only $7. Help out our show. Help out them. We're so promotional now. Get some good picks. Yeah. But let's get to the real show. We're talking Naked Wines. What does Naked Wines do? Yeah, so Naked Wines is the first 100% digital business model for wine, or at least they claim they are. And basically you can simply order wine online just like any other digital business if you want, but then it also has a membership component to it.

So just think of this basically as wine direct-to-consumer. And here's really how it works. So Naked Wines sells recurring wine club memberships to its members who are basically called angels. That's what they refer to them as. I think it's $40 a month. and those members can pick from a bunch of different wines and that forty dollars kind of goes down as a credit uh you can use it in your wine purchases but then naked wines also pulls that money and helps fund new winemakers so you know if a family a small family didn't

have the cost or the the money to get started naked wines is going to help them and basically on the winemaker side they're like pitching naked wine so like hey we have this idea here's the vineyard here's our track record yeah yeah would you be interested in this and naked wines can say yes here's the funding and then the winemaker on their side gets guaranteed sales and distribution they don't have to go through retailers they don't have to hire agents or anything like that they get naked wines distribution uh and customers and so then there's kind of been this community built around it so you can interact with the winemakers the wine buyers can interact with them they can you know talk to them say you know what did you you know what process did you go

through old people love to do that so um and not just hey don't need to classify wine connoisseurs yeah yeah they're gonna be ages too right um but yeah it feels a little bit like a stitch fix type of model for wine i guess um but more of a deeper relationship between the customer and the brands yeah yeah yeah and then uh am i missing anything on there or does that kind of serve the value So the angel, the pitch to be an angel is one, you get discounts on wine, two, you get credits and stuff, but you're funding the winemaker. So they try to make that relationship pretty personable. You're supporting independent winemakers instead of the conglomerates, you know?

Yeah. And you can, like, it's not like you're just putting the money into a pool and not seeing who you're funding. I believe you can specifically pick out certain wines or winemakers and help fund them. At least you, I think you can. You're not required to. Right. Yeah.

And then history about the business, Naked Wines was started out – well, it started out as a small DTC component of a traditional wine retailer business. So it was called Majestic Wines and it has, I think, 190 physical stores all throughout the UK. So this is sort of just your traditional retailer. But they sold Majestic Wines to Fortress Investment Group, which I believe is private equity, for $115 million. I think that helped bolster Naked Wines' balance sheet. Yes, definitely. Because they recently made a huge – they had a huge cash influx. So I'm assuming that's where it came from.

But emerging from the sale, they decided to completely overhaul and restructure management. So Rowan Gormley was the initial founder of Naked Wines. But I think as they saw Naked Wines continuing to grow and have a huge presence throughout the US, I mean they've talked about the US a ton. They decided it would be good to bring in new management. And so Nick Devlin, who is the former COO and head of the U.S. operations, was appointed to be the new CEO. And so basically they had one really old traditional retail business and one emerging DTC brand or business, and they sold one off and they just remodeled. Yeah, they're pure naked wines now. And it's not just a U.S. business.

I think it's, what, 50% in the U.S.? So the majority, and it's the fastest growing segment, but they do have some European stuff as well. And it might just be United Kingdom, but they also have Australia too, those big three markets. But I'll get to the valuation. The ticker is W-I-N-E or WINE. Brilliant ticker. We're making tickers here.

Yeah, we're huge. I mean, that's the entire investment thesis. And that's when you're listed in the United Kingdom. So you might see that if you're looking up on some sort of investment research site or anything like that. But if you're going to invest in the U.S., the ticker is M-J-W-N-F, and they're on the OTC markets. That's like a typical, like, what do we look at something in that? Oh, it's kind of like Nintendo.

You know, you're not investing in the Japanese shares. They have the separate shares for U.S.-based investors and other markets around the world. Their market cap right now is about $713 million as of our recording, but has a $613 million enterprise value. And you're going to convert a lot of the numbers from British pounds to U.S. dollars. So make sure to check your conversions because I know I was checking a few different sources because some of the sites can be wrong. And I did it from using the actual share count by the share price. But I know that Schwab actually had the wrong market cap. And I'm assuming Robinhood definitely has the wrong market gap, even if they carry this at all.

So do check what the actual market cap or enterprise value is. Some valuation numbers, their EBITDA sales is about 1.75 on a trailing 12-month basis, and EBITDA gross profit is about 4.5. Probably the most important number there is EBITDA gross profit, but they also give out a number of standstill EBIT, and that's a non-GAAP metric that they just come up with by themselves. It's like, all right, if we took out any of our investments, what would our EBIT be? And they're trading at about 17 times what their estimated standstill EBIT is.

but again that's not i mean they make that number up so yeah i'll i have the definition here this would be the adjusted ebit number if the investment in new customers was reduced to the level needed just to replenish the current customer base which makes sense but they they can make up that number however they want so really you should be looking at the cash flow numbers and right now they're about break even on profitability and cash flow so nothing to see much there um no dividend as you probably expect. Balance sheet numbers, cash and equivalents of about $98 million, $109 million in inventory, $61 million in accounts payable. So quite large for their size. That's how their business runs. They have a lot of IOUs to either customers or winemakers or stuff like that.

$80 million in deferred angel income. So that's where that deferred angel income is going. But no big debt outstanding. I mean, their debt is really, the angels are their funding. So that's who they're going to have to eventually pay back in wine credits. But they're not going to the capital markets, which I guess is a nicer thing. But you are relying on the angel customer base. Yeah. And they also paid out a special dividend at one point. I wonder if that was maybe tied to the sale of Majestic Wines.

Yeah, definitely. Definitely, yeah. Because I saw there was just like some random dividend period. But typically they do not pay one out. Also, I should note they only report every six months. Yeah, British companies, lazy. Yeah. So you're not going to get quarterly reports with this company. So the numbers I'm giving you are for the first half of 2020. Sorry, 2021, right? Fiscal year 2021.

Yeah. So this, yes, this is for the six or the 26 weeks ending on September 28th. Okay. I'm looking at it now. So the six months prior to that and the numbers I have revenue was $191 million and this is converted to US dollars. that was up 80% year over year. That was sort of a one-time temporary shift. Typically it's not growing that fast. That was a lot due to COVID because people were isolated and drinking a lot. But revenues from repeat customers was $44 million. That's up 89% year over year. So it makes up about 23% of overall revenue. So I believe they defined it as like repeat contribution. So the goal is that a lot of the people, a lot of the customers become repeat

customers and that number grows as percentage of overall revenue losses before taxes was 11 million dollars so yeah they could they i mean if they excluded their investments they'd be profitable but obviously you want a company that's uh investing for some growth and then they had 93 million in cash on the balance sheet they have 757 000 active angels that grew 37 percent over the last 12 months increased their warehouse capacity by 104 percent yeah so big capex or big whatever i don't know where they're classifying it as maybe just leases but a lot of expenses on building out that growth right now yeah and then uh their rolling 12 month standstill was 26 million but i forgot to convert that that was 26 million in euros so probably like

32 33 million us dollars yeah um and we already started to find what that was but it seems unlikely that they'll be a company that generates absurd margins at scale right now their gross margins are like 39 and if you just think about the value chain they're not going to get a huge slice of that because obviously you have to pay the winemakers and you're getting the revenue from your shoppers so uh yeah it's a company that could generate consistent profits but probably not absurd margins yeah it seems like their cash flow margins you know could be above 10 but probably not much north of 20 percent um and probably not getting close to 20 percent but i mean that doesn't mean it's a bad business all right let's take a break and then we'll get to

the second half cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply all right welcome back next up is digging trenches which is where we try to identify whether this company has an emote competitive avenge whatever and it's a zero one two or three rating three being the best zero being the worst ryan what do you think about naked wines here

um it's kind of a unique business so well i didn't check but i probably should have if they have any sort of regulatory moat because i don't know if anyone can just deliver alcohol i was i was reading up on this yes each state has separate sales taxes a lot of states have different logistics things where you can't sell in certain ways uh so i think they do have some sort of regulatory moat where they can take out they deal with that for the winemakers you know what i mean right um where that they control the distribution that's a big value proposition for people okay um then yeah i'd say it's high and they also feel i don't know anyone else that's doing this so i guess maybe first mover advantage as well um and then i mean i honestly don't know

of any other business that's doing dtc wine well there's there's some other wine clubs yes uh There will be some that deliver, but with this model, no, not this exact model. Okay. I don't know, two, I guess. Two, I mean, it's not irreplaceable. No, it's not. Yeah, it's not like a must-have, but. It's difficult to do.

I think, yeah, I'd probably give it closer to two and a half. The only big part of the business. Actually, because the winemakers tend to be so loyal to naked wines from what I saw, I'd say that, yeah, they're probably – it's probably a little higher because they really have built a community around it and it's not just the business model in and of itself that's a moat. It's the community. Yeah, and this kind of brings me – reminds me of what the team at Ensemble Capital talks about with idiosyncratic businesses. And I always forget the definition of idiosyncratic, but I believe this business model in its uniqueness feels like one of these type of businesses where that can develop the mode where it's super hard to repeat because it's such a unique thing that you can't just repeat and go after another set of customers. Yeah.

What are you looking at for further reading? Okay. So Sean Tabak, spelled T-A-B-A-K, just joined a CFO in December. So the new management, what's his name, Devlin? Nick Devlin. Nick Devlin, yeah, that's the new CEO. I believe they're trying to bring on a new executive team that has more experience in the United States because that's their big growth push. And I think the CFO role at Naked Wines is very important because the financing of the winemakers, making sure all the numbers work out versus the angels, their bank accounts, winemakers' bank accounts.

So that's very important to have the balance sheet for this optimized, to optimize returns. So the CFO role is vital. Probably want to do some more research on, gosh, I don't know if it's a woman or a guy. Them, just on them. Okay. Mine's just trying to get a better grip on the unit economics. I understand vaguely how this works, but I'd also like to know who owns the wineries, what sort of that structure looks like, what naked wine's actual payout is. So how much is going to the winemakers?

How much does Naked Wines take? And then also there's this $100 coupon thing. This is probably how most people, if you're a consumer, have heard of the business. It feels like everyone got this $100 coupon. So is that just a marketing strategy? Yeah. I saw it online everywhere and we got one at our house. I don't know why or where.

but uh if you buy something for a hundred if you buy 160 worth of wine you get a hundred dollars off um which good mark yeah it definitely feels like a loss later but uh yeah it's marketing cost right yeah i guess just throw it in the marketing budget but um yeah i'd like to know how that works and then what kind of lifetime value those customers have and if they stick around yeah the lifetime value is important there if they're going to spend so much to acquire those customers All right, future growth opportunities. Why don't you go first because you got the big one for them. USA, yeah.

I have a quote here. They talk, which makes me a proud American drinker, I guess. They said, we see potential for market share gain in all of our geographies. However, the opportunity is largest in the U.S. where the market dwarfs the rest of the world in terms of size and gross profit potential. Demand is there. The U.S. market for wine is around $40 billion and $20 billion is estimated to be addressable by our model. uh and this the u.s segment specifically grew insanely fast in the first half so i guess americans that are locked locked in their houses love to drink wine they love to order it straight

to their doors um so i guess just continuing to spend and i mean this is really what they're doing anyways but also making sure that you have the right winemaker relationships in the u.s not just the consumers because like like we said a large part of the business model is being able having the shoppers be able to connect with the winemakers and so if you can connect with them now whatever post on their wall and they are in nevada or napa and you're in portland you can easily drive down or fly down and go visit the winery once things open back up so just really focusing on the winemakers in the u.s and uh trying to get those yeah and the exclusivity is also important if these wines are exclusive to uh naked wines members and those wines are fantastic or whatever

they have a high rating i think people will like that as well i think we should note that you know you have mentioned that uh the covet has given them a bump but we're not you know we're not sure whether that's all going to revert back in future months there may be some shift i think they gave a number that before the pandemic five percent of wine was bought online and now during the pandemic 20 is bought i mean i don't know if it's all going to revert back to that five percent market share so that growth while yes a little bit artificial may still it's not just going to permanently go back yeah agreed um what's your growth opportunity okay it's hard to because they kind of just want to get the business model going there's not much with the internal business that they want to

change i mean i could mention like well go to this winemaker or this one or this one but we'll leave that up to them uh if they wanted to get out of wine they could potentially do this for beer i think uh craft breweries do need funding uh and a lot of them have just gotten bought up by like anheuser-busch and stuff which makes it similar to the wine market where everything's kind of owned by these conglomerates however you know it seems like craft breweries are doing fine on their own i don't know how much angel funding they need and they're the diehards aren't as for beer there's not the same level as for wine so that might not work but i think they could potentially move into different types of the the liquor market uh it'd probably be less of an investment you know the

you wouldn't be able to do a 40 membership for beer or something like that that is interesting no i mean i i would definitely say that's an available market long term right now it's really probably all about cultivating product market fit around uh the wine brand well they found it but just growing you know right um highlights and lowlights for the business you want to go first sure so they have a competitive advantage i think versus the legacy distribution system so it's similar to you know the beer market if you're familiar with that how uh whatever the places grocery stores would probably be the main one for wine or restaurants um where i mean you have you have the distribution you have the shelves and all these other companies who are owned by these

conglomerates and things like that really kind of stuff the shelves and they're all owned by a few companies and it's really hard as an independent maker to get into there but with naked wines that fixes that for the winemaker so i think that is a big competitive advantage and i kind of like how on the consumer side they can be a stitch fix like matchmaker i bet some listeners are rolling their eyes right now but i do think it can help if you can be the matchmaker for wines and they have i think what 90 plus of their wine choices that people have gotten you know they're matchmaking i know they're not all matchmaking some people just choose what wine they want but i think 90 are five star rated so i think that's a good sign um that they can help you know the customer solve

the problems they want whether they like you know malbec or merlot or whatever um and another thing on the financial side is the fixed cost of decreased 5% as a percentage of revenue over the past year. So that leverage, especially with this asset light model, I mean, I think it can really help them out in the long run. Okay. What about low lights? Low lights. Yeah. So the number of angels seems capped. Right now they're at 750K. I don't know if it can go over a few million, at least in the US, maybe globally could get closer to 10 million but not much more and saying you know the boost with covid i think you're going to talk about that more but lastly fire seasons are getting worse that's big for wine um you know

the climate change stuff is getting worse and there's other factors maybe a tail risk for wine because they are you know climate is important for wine uh you know water is important that's why people are always like was this a fire year this one kind of has a smoky aroma yeah that's exactly what they're saying but one other highlight i forgot is that with the 750 000 angels if we assume they all pay 40 bucks a month maybe they don't but if they all pay 40 bucks a month that is 30 million dollars in funding coming in from angels each month i think that's a huge advantage over other d to c players or just wine sellers in general yeah yeah i'm curious what the lifetime value looks like they might have that number somewhere in there um my highlights the model

This business model lowers the barriers to entry for winemakers, which is huge. Then it also lowers prices for wine shoppers. The other thing that I think could be a huge value driver for them is the community aspect because for some reason, people love to pretend they know a lot about wine. So being able to connect with the winemakers. Have you ever – you go to a winery and they're like so proud to like ask questions to the winemaker? I think this gives them a decentralized way to do that. And so that could be like an actual value driver and then maybe getting to meet the people in person as well. I just think that's a cool community.

And then my lowlights, it does feel like they saw a temporary boost thanks to COVID. I mean it doesn't just feel like it. They did see a boost because of COVID. Yeah, it went from 10% growth-ish to like 80%. Yeah, definite boost. So I have a hard time imagining there won't be some sort of reversion, maybe not in the next report, but as wineries are open again and people start going out and the vaccine is distributed, you know, there's a good chance people, a lot of the people that switched to naked wines go back at least some of the time, spend some of their consumer dollars at actual wineries. But that doesn't mean the growth isn't still sustainable and there isn't a niche crowd or a niche market for this. The other thing for me is they talk a lot about how much growth they see ahead, which is great.

But if there is reversion, I want them to have some cash on the balance sheet. And so maybe not investing all that cash, keeping some of it and being a little bit conservative just in case demand starts to recover or starts to revert. uh looks like they have 98 million so i think it should be good but yeah that's something to watch for the next few quarters yeah other than that i didn't see any major low lights it feels like they got younger too um in terms of management team yeah the chairman of the board stepped away but i think he was really more tied to majestic wines yeah so they really broke off from majestic wines yeah in like 29 i think it was late 2019 or maybe even in 2020 not i think it was 2019 So they're still kind of in that transition period.

But we'll hit the last question here. Yeah, more or less interested. What do you think? I'm more interested. I keep having to check myself because this is one of those companies that's super unique and you want to like it. And the business model you want to like and it just seems kind of like a great fit. I don't know. It's not something that's really well covered.

It feels like it could be a good compounder and a good growing business for a long time. But wanting to like something can lead to biases and maybe not a true reflection of the financials. The valuation isn't perfect by any means. They're trading at whatever it is, almost 20 times the standstill EBIT, which is really an adjusted metric. It's not bad. It's not terrible. I'm glad they're just trading at less than five times gross profit. yeah that maybe that's why i'm biased to them is because they're not trading at a crazy valuation

i do like it but i'm going to keep looking for red flags also something that i did like to see they're supposed to self-audit like uh they are independent or whatever they're not on there they're not enough they're on the big um you're not required to exchange they're on the the second tier one yeah uh but they hired deloitte anyways which uh originally it was a like a canceling thing when i saw that uh they didn't have to audit and i was like okay well this is pointless and then i saw that they hired deloitte and that's just uh kind of yeah it helps reassure us as investors yeah they were willing to um you know the big four whatever uh they're not perfect but seeing that they're willing to spend up to do what the the big boys do and if they continue to grow

they should be able to list on the the london stock exchange to be on there too yeah what about you definitely more interested i mean i like the valuation um you know it's not perfect with their gross margin numbers uh but i think the business models without looking further into it i think it's sound and unique enough that it's very defensible um i think that's it i mean management has to check out i don't know but definitely more interested here um it feels a bit to me like i'm gonna do the shopping thing i'm probably gonna use that coupon and see what the shopping experiences do a little uh yeah definitely do that get us some anecdotal evidence um all right i think that's going to do it we good yeah yeah okay uh remember as always to use our promo code

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