Core Insights - The Duckhorn Portfolio Inc is scheduled to release its Q4 2024 earnings on October 7, 2024, with expected revenue of $106.55 million and earnings of $0.09 per share [1] - For the full year 2024, revenue is projected at $402.05 million, with earnings expected to be $0.50 per share [1] Revenue Estimates - Over the past 90 days, revenue estimates for the full year 2024 have increased from $401.68 million to $402.05 million, while 2025 estimates rose from $484.53 million to $487.20 million [2] Earnings Estimates - Earnings estimates for the full year 2024 have remained steady at $0.50 per share, with 2025 estimates at $0.61 per share [2] Historical Performance - In the previous quarter ending April 30, 2024, actual revenue was $92.53 million, missing expectations of $93.60 million by -1.14%. Actual earnings were $0.12 per share, missing expectations of $0.14 per share by -14.29% [3] Price Targets - The average one-year price target for The Duckhorn Portfolio Inc is $9.67, indicating an upside of 78.02% from the current price of $5.43. The high estimate is $12, and the low estimate is $7 [4] - GuruFocus estimates the GF Value for the company at $20.17, suggesting an upside of 271.45% from the current price [4] - The average brokerage recommendation is currently 2.6, indicating a "Hold" status [4]

Core Viewpoint - NAPA's 3Q24 earnings report indicates a challenging outlook due to weakening consumer demand for luxury wines, with management's optimism appearing misplaced [1][8][9]. Financial Performance - NAPA reported adjusted revenues of $92.5 million, adjusted EBITDA of $37.7 million, and adjusted EPS of $0.14 for 3Q24 [1]. - Revenue growth of 1.4% was primarily driven by pricing and mix, contributing 6%, while volume declined by 4.6% [1]. - Sales decreased by 11% in Wholesale to Distributors and 7.6% in Wholesale to CA Direct-to-Retail, but increased by 71.6% in Direct-to-Consumer (DTC) [1]. - Gross margins were at 55.5%, a decline of 15 basis points year-over-year, but adjusted EBITDA margin expanded by approximately 100 basis points to 40.9% [1]. Market Conditions - The luxury wine category saw a 1% decline in 3Q24, contrary to management's expectations of low-single-digit growth [1]. - Demand for ultra-luxury wines is decreasing, as evidenced by lower-than-expected response rates to high-priced offerings [1]. - Increased days of inventory on hand at distributors indicate weaker industry and consumer demand, suggesting fewer sell-in opportunities in the near term [1]. Future Guidance - NAPA's revised guidance for FY24 organic revenue is now expected to be between $382 million and $392 million, reflecting a decline of 5.2% to 2.7% [6]. - The outlook for 4Q24 is particularly concerning, with an implied decline of approximately 11% compared to previous expectations of flat growth [6]. - The macroeconomic environment, characterized by high inflation and potential interest rate hikes, is likely to further impact consumer demand for luxury wines [8][9]. Investment Outlook - The recommendation remains a sell due to the uncertain outlook and high likelihood of missing FY25 revenue growth expectations [8][9]. - Historical data shows that when NAPA missed consensus estimates, the share price experienced significant declines, indicating potential downside risk [7][8].

Company Overview - The Duckhorn Portfolio, Inc. reported quarterly earnings of $0.14 per share, matching the Zacks Consensus Estimate, but down from $0.16 per share a year ago [7] - The company posted revenues of $92.53 million for the quarter ended April 2024, exceeding the Zacks Consensus Estimate by 0.37% and up from $91.24 million year-over-year [8] - Over the last four quarters, the company has surpassed consensus EPS estimates only once [8] Earnings Outlook - The consensus EPS estimate for the upcoming quarter is $0.13 on revenues of $105.83 million, and for the current fiscal year, it is $0.59 on revenues of $401.82 million [11] - The earnings outlook for the company is mixed, with current estimate revisions translating into a Zacks Rank 3 (Hold) for the stock, indicating expected performance in line with the market [4] Industry Context - The Beverages - Alcohol industry, to which The Duckhorn Portfolio belongs, is currently ranked in the bottom 46% of over 250 Zacks industries, which may impact stock performance [5] - Empirical research indicates that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1 [5] Stock Performance - The Duckhorn Portfolio shares have declined approximately 21.2% since the beginning of the year, contrasting with the S&P 500's gain of 12.3% [9] - The company's performance has raised questions among investors regarding future stock movements, particularly in relation to earnings estimate revisions [10]

PART I - FINANCIAL INFORMATION [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for the period ended April 30, 2024, detailing financial position, operations, equity, and cash flows, with notes on the Sonoma-Cutrer acquisition and its financial impacts [Condensed Consolidated Statements of Financial Position](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Financial%20Position) This statement details the company's financial position, showing significant increases in total assets, liabilities, and stockholders' equity primarily due to the Sonoma-Cutrer acquisition Condensed Consolidated Statements of Financial Position (in thousands) | | April 30, 2024 | July 31, 2023 | | :--- | :--- | :--- | | **Total current assets** | $521,994 | $387,530 | | **Property and equipment, net** | $565,806 | $323,530 | | **Goodwill** | $483,818 | $425,209 | | **Total assets** | **$1,793,464** | **$1,347,682** | | **Total current liabilities** | $64,502 | $74,460 | | **Revolving line of credit** | $102,000 | $13,000 | | **Long-term debt, net** | $203,206 | $210,619 | | **Total liabilities** | **$534,928** | **$405,274** | | **Total stockholders' equity** | **$1,258,536** | **$942,408** | [Condensed Consolidated Statements of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This statement presents the company's operating results, showing a slight increase in net sales for the three-month period but a decrease for the nine-month period, alongside a decline in net income due to higher expenses Condensed Consolidated Statements of Operations (in thousands, except per share data) | | Three months ended April 30, 2024 | Three months ended April 30, 2023 | Nine months ended April 30, 2024 | Nine months ended April 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | **Net sales** | $92,532 | $91,242 | $298,086 | $302,901 | | **Gross profit** | $51,443 | $50,511 | $163,614 | $160,407 | | **Income from operations** | $21,704 | $26,522 | $74,145 | $81,100 | | **Net income attributable to The Duckhorn Portfolio, Inc.** | $13,323 | $16,797 | $44,717 | $51,529 | | **Diluted EPS** | $0.12 | $0.15 | $0.39 | $0.45 | [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement details cash flows, showing net cash used in operating activities for the nine months ended April 30, 2024, a significant decrease from the prior year, primarily due to increased inventories and the Sonoma-Cutrer acquisition Condensed Consolidated Statements of Cash Flows (in thousands) | | Nine months ended April 30, 2024 | Nine months ended April 30, 2023 | | :--- | :--- | :--- | | **Net cash (used in) provided by operating activities** | $(409) | $51,753 | | **Net cash used in investing activities** | $(71,080) | $(14,111) | | **Net cash provided by (used in) financing activities** | $80,871 | $(4,732) | | **Net increase in cash** | $9,382 | $32,910 | | **Cash - End of period** | $15,735 | $36,077 | [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed explanations of the financial statements, highlighting the Sonoma-Cutrer acquisition, shifts in sales channels, a new class-action lawsuit, increased debt, and a higher effective tax rate - On April 30, 2024, the Company acquired Sonoma-Cutrer for consideration valued at **$317.5 million**, consisting of **$49.6 million** in cash and **31.5 million** shares of common stock valued at **$267.1 million**[48](index=48&type=chunk) - The acquisition added approximately **$61.4 million** in inventories, **$244.8 million** in net property and equipment, a **$17.0 million** indefinite-lived trade name, and **$58.6 million** in goodwill[52](index=52&type=chunk)[59](index=59&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk) Net Sales by Channel | Channel | Three months ended April 30, 2024 | Three months ended April 30, 2023 | | :--- | :--- | :--- | | Wholesale — Distributors | 60.4% | 68.6% | | Wholesale — California direct to trade | 16.0% | 17.5% | | DTC | 23.6% | 13.9% | - A putative class action lawsuit was filed on March 22, 2024, alleging wage and hour violations, with the potential loss not yet reasonably estimable[94](index=94&type=chunk) - The effective tax rate for the nine months ended April 30, 2024, was **29.3%**, up from **26.3%** in the prior year, primarily due to non-deductible transaction costs from the Sonoma-Cutrer acquisition[113](index=113&type=chunk)[114](index=114&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, highlighting net sales trends, improved gross profit margin, increased SG&A expenses due to the Sonoma-Cutrer acquisition, and growth in Adjusted EBITDA, alongside liquidity and capital resources Key Financial Metrics (in thousands) | | Three months ended April 30, 2024 | Three months ended April 30, 2023 | Nine months ended April 30, 2024 | Nine months ended April 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | **Net sales** | $92,532 | $91,242 | $298,086 | $302,901 | | **Gross profit** | $51,443 | $50,511 | $163,614 | $160,407 | | **Adjusted EBITDA** | $37,726 | $35,820 | $115,174 | $110,298 | - The Sonoma-Cutrer acquisition, completed on April 30, 2024, for approximately **$317.5 million**, is expected to be accretive in the first full fiscal year with up to **$10.0 million** in run-rate synergies[144](index=144&type=chunk)[145](index=145&type=chunk) - Gross profit margin increased to **54.9%** for the nine months ended April 30, 2024, up from **53.0%**, driven by lower discounts and favorable DTC offering timing[164](index=164&type=chunk) - Selling, general and administrative expenses increased by **12.8%** for the nine months ended April 30, 2024, primarily due to higher transaction and integration costs from the Sonoma-Cutrer acquisition[169](index=169&type=chunk)[170](index=170&type=chunk) - Net cash used in operating activities was **$0.4 million** for the nine months ended April 30, 2024, a **$52.2 million** decrease from the prior year, mainly due to increased inventory purchases and payment timing[196](index=196&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=45&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is exposed to market risks including interest rate risk on variable-rate debt, foreign currency risk from Euro-denominated purchases, and commodity price risk for raw materials, which are managed through various strategies - The company faces interest rate risk on **$315.3 million** of variable-rate debt as of April 30, 2024, with a **100 basis point** increase potentially raising annual interest expense by **$3.1 million**, partially mitigated by an interest rate swap[215](index=215&type=chunk) - Foreign currency risk, primarily from Euro-denominated barrel purchases, is mitigated using foreign exchange forward contracts[217](index=217&type=chunk) - Commodity price risk for grapes and raw materials is managed through diversified sourcing, varied supply contracts, and annual price negotiations, without commodity hedging[219](index=219&type=chunk)[221](index=221&type=chunk) [Item 4. Controls and Procedures](index=46&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of April 30, 2024, with new controls implemented for the Sonoma-Cutrer acquisition and no other material changes to internal controls - The CEO and CFO concluded that disclosure controls and procedures were effective at a reasonable assurance level as of April 30, 2024[223](index=223&type=chunk) - New controls related to accounting policies and procedures were implemented during the quarter for the Sonoma-Cutrer acquisition[224](index=224&type=chunk) PART II - OTHER INFORMATION [Item 1. Legal Proceedings](index=47&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in a putative class action lawsuit filed on March 22, 2024, alleging wage and hour violations, with the potential loss not yet reasonably estimable - On March 22, 2024, a former employee filed a putative class action lawsuit alleging wage and hour violations under the California Labor Code[228](index=228&type=chunk) - The claims primarily relate to alleged unpaid wages and missed meal and rest breaks, with the amount of any potential loss not yet reasonably estimable[228](index=228&type=chunk) [Item 1A. Risk Factors](index=47&type=section&id=Item%201A.%20Risk%20Factors) This section updates risk factors, focusing on substantial non-recurring costs, integration challenges, and the potential unrealized benefits from the Sonoma-Cutrer acquisition, alongside the significant influence of major stockholders - The company has incurred and expects substantial non-recurring costs, including legal, advisory, and integration fees, associated with the Sonoma-Cutrer merger[231](index=231&type=chunk) - Integrating Sonoma-Cutrer may be more difficult, costly, or time-consuming than expected, risking that anticipated benefits and synergies may not be fully realized[233](index=233&type=chunk) - As of April 30, 2024, TSG and Brown-Forman affiliates owned approximately **41.8%** and **21.4%** of outstanding common stock, respectively, granting them significant influence over company decisions[236](index=236&type=chunk) [Item 5. Other Information](index=48&type=section&id=Item%205.%20Other%20Information) This section discloses the adoption of Rule 10b5-1 trading plans by two executive officers on April 9, 2024, for share sales between July and December 2024 Rule 10b5-1 Trading Plans Adopted in Q3 FY2024 | Name | Position | Adoption Date | Duration of Trading Agreement | Aggregate Number of Securities to be Sold | | :--- | :--- | :--- | :--- | :--- | | Pete Przybylinski | EVP, Chief Sales Officer | April 9, 2024 | July 9, 2024 - Dec 31, 2024 | 100,000 | | Zachary Rasmuson | EVP, Chief Operating Officer | April 9, 2024 | July 9, 2024 - Dec 31, 2024 | 70,000 | [Item 6. Exhibits](index=49&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including the Sonoma-Cutrer merger agreement, amended bylaws, an employment agreement, and CEO/CFO certifications

Exhibit 99.1 The Duckhorn Portfolio Announces Fiscal Third Quarter 2024 Financial Results Net Sales of $92.5 million, up 1.4% year over year; Net Income of $13.3 million, down 20.7% year over year; Adjusted EBITDA of $37.7 million, up 5.3% year over year; Updates Fiscal 2024 Guidance ST. HELENA, CA, June 6, 2024 – (BUSINESS WIRE) – The Duckhorn Portfolio, Inc. (NYSE: NAPA) (the "Company") today reported its financial results for the three months ended April 30, 2024. Third Quarter 2024 Highlights "Our teams ...

Exhibit 99.4 Unaudited Pro Forma Condensed Combined Financial Information On November 16, 2023, The Duckhorn Portfolio, Inc., a Delaware corporation (the "Company" or "Duckhorn"), Auguste Merger Sub, Inc., a California corporation and an indirect wholly-owned subsidiary of the Company ("Merger Sub"), Brown-Forman Corporation, a Delaware corporation ("Brown- Forman"), and Sonoma-Cutrer Vineyards, Inc., a California corporation and a wholly-owned subsidiary of Brown-Forman ("Sonoma-Cutrer"), entered into an A ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2024 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-40240 The Duckhorn Portfolio, Inc. (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation o ...

Financial Data and Key Metrics - Q1 gross profit was $53 9 million with a gross margin of 52 5% up 190 basis points YoY driven by wholesale channel optimization and easing input cost inflation [4] - Operating expenses increased to $30 5 million up $4 7 million or 18 4% YoY but adjusted operating expenses decreased $0 2 million or 1% due to cost management [4] - Net income was $15 5 million or $0 13 per diluted share while adjusted net income was $17 2 million or $0 15 per diluted share [5] - Adjusted EBITDA was $34 7 million a decrease of $1 million or 2 7% YoY with an improved margin of 90 basis points [5] - Cash at the end of Q1 was $21 2 million with total debt of $241 3 million resulting in a leverage ratio of 1 7 times net debt [5] Business Line Data and Key Metrics - Wholesale distributor channel declined 5 4% in Q1 but net sales growth was estimated to be flat to slightly down YoY excluding last year's shipment timing impact [1] - California wholesale direct-to-trade declined 7 3% YoY driven by similar factors affecting the wholesale distributor channel [2] - Direct-to-consumer channel declined 10 8% but per-person spend remains high indicating success in customer engagement strategies [2] Market Data and Key Metrics - Distributor days of inventory on hand remained healthy at 65 days [2] - The direct-to-consumer business is navigating a changing landscape with confidence in initiatives like elevated tasting experiences [3] Company Strategy and Industry Competition - The company remains committed to its wholesale strategy to expand accounts and points of distribution [1] - The acquisition of Sonoma-Cutrer Vineyards is expected to close in spring 2024 and is seen as a keystone for future growth [9][10] - The acquisition is expected to deliver significant shareholder value and enhance the company's luxury wine portfolio [9][10] Management Commentary on Operating Environment and Future Outlook - The company is pleased with Q1 results and remains confident in its ability to outperform the broader wine industry despite some uncertainty in consumer sentiment [7] - Full-year fiscal 2024 outlook includes net sales growth of 4% to 6% and adjusted EBITDA growth of 4% to 6% with a margin of approximately 35 5% [6] - The company expects low single-digit net sales growth in Q2 due to earlier-than-anticipated shipments and a softer consumer environment [6] Other Important Information - The company is focused on identifying additional sources of efficiency and synergy in preparation for the integration of Sonoma-Cutrer [15] - There are opportunities for incremental revenue growth through cross-selling and expanding Sonoma-Cutrer's footprint in the DTC channel [15] Q&A Session Summary Question: Implied strong growth in the back half of the year - The back half growth is driven by innovation and inventory restocking including the launch of low Alk Decoy Sauvignon Blanc and restocking of Duckhorn Chardonnay [24][25] - The company expects growth in the back half but remains cautious about consumer sentiment [33] Question: Category softness and distribution gains - The wine industry was flat in the last 12 weeks but the company outperformed the industry on a 52-week basis [38] - There is no indication of trading down in the industry with the $15 plus category performing slightly better than the overall industry [39] Question: Gross margin cadence for the rest of the year - Q1 and Q2 are expected to see slight margin improvement while Q3 and Q4 will face margin pressure due to increased trade spend [43] Question: Decoy red varietals and pricing strategy - The company took price increases on Decoy red wines last year and expects a period of digestion but sees no issues with brand positioning [48] - The company will support the brand with trade and digital consumer engagement [49] Question: On-premise vs off-premise performance - On-premise performance has been slightly stronger than off-premise in recent months particularly at higher price points [52] - The company views the balance between on-premise and off-premise growth as positive for its omnichannel strategy [53]

[PART I - FINANCIAL INFORMATION](index=6&type=section&id=PART%20I) [Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) Unaudited Q1 FY2024 financial statements reflect decreased net sales and income, with increased assets and liabilities Condensed Consolidated Statements of Operations (Unaudited) | Metric | Three months ended Oct 31, 2023 | Three months ended Oct 31, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $102,509 thousand | $108,171 thousand | -5.2% | | Gross profit | $53,853 thousand | $54,710 thousand | -1.6% | | Income from operations | $23,370 thousand | $28,971 thousand | -19.3% | | Net income attributable to The Duckhorn Portfolio, Inc. | $15,537 thousand | $19,815 thousand | -21.6% | | Diluted Earnings Per Share | $0.13 | $0.17 | -23.5% | Condensed Consolidated Statements of Financial Position (Unaudited) | Metric | October 31, 2023 | July 31, 2023 | | :--- | :--- | :--- | | Total current assets | $490,028 thousand | $387,530 thousand | | Total assets | $1,453,203 thousand | $1,347,682 thousand | | Total current liabilities | $157,486 thousand | $74,460 thousand | | Total liabilities | $494,436 thousand | $405,274 thousand | | Total stockholders' equity | $958,767 thousand | $942,408 thousand | Condensed Consolidated Statements of Cash Flows (Unaudited) | Metric | Three months ended Oct 31, 2023 | Three months ended Oct 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $18,066 thousand | $26,384 thousand | | Net cash used in investing activities | ($10,395) thousand | ($6,418) thousand | | Net cash provided by (used in) financing activities | $7,158 thousand | ($17,808) thousand | | Net increase in cash | $14,829 thousand | $2,158 thousand | [Note 1: Description of Business](index=11&type=section&id=Note%201.%20Description%20of%20Business) The company produces luxury wines, generating revenue via wholesale and direct-to-consumer channels - The company produces luxury wines under brands such as Duckhorn Vineyards, Decoy, Goldeneye, and Kosta Browne[23](index=23&type=chunk) - Revenue is generated through two main channels: **wholesale** (to distributors and California retailers/restaurants) and **direct-to-consumer (DTC)** via clubs, website, and tasting rooms[24](index=24&type=chunk) [Note 3: Revenue](index=13&type=section&id=Note%203.%20Revenue) Net sales disaggregation highlights wholesale as largest segment and significant deferred revenue increase from DTC Net Sales by Channel | Channel | Q1 FY2024 (%) | Q1 FY2023 (%) | | :--- | :--- | :--- | | Wholesale - Distributors | 77.0% | 76.4% | | Wholesale - California direct to trade | 15.6% | 15.8% | | DTC | 7.4% | 7.8% | - Deferred revenue increased to **$11.2 million** at October 31, 2023, from **$0.1 million** at July 31, 2023, primarily due to cash collected from DTC channel sales ahead of shipment[38](index=38&type=chunk)[39](index=39&type=chunk) [Note 6: Debt](index=14&type=section&id=Note%206.%20Debt) Total debt, primarily from a Credit Facility, was **$241.3 million** as of October 31, 2023, with all covenants met Long-Term Debt Composition (in thousands) | Component | October 31, 2023 | July 31, 2023 | | :--- | :--- | :--- | | Revolving line of credit | $23,000 | $13,000 | | Term loan, first lien | $218,332 | $220,832 | | **Total debt** | **$241,332** | **$233,832** | - As of October 31, 2023, the company had **$402.0 million** of unused capacity under its revolving credit facility[52](index=52&type=chunk) [Note 13: Subsequent Events](index=22&type=section&id=Note%2013.%20Subsequent%20Events) The company agreed to acquire Sonoma-Cutrer Vineyards for approximately **$400 million**, closing expected in Q3 FY2024 - The company agreed to acquire Sonoma-Cutrer Vineyards, a specialist in luxury Chardonnay brands[80](index=80&type=chunk)[81](index=81&type=chunk) - The purchase price is approximately **$400.0 million**, consisting of about **$350.0 million** in the Company's common stock (**31,531,532 shares**) and **$50.0 million** in cash[82](index=82&type=chunk) - The transaction is expected to close in the **third quarter of Fiscal 2024**, subject to regulatory approvals and customary closing conditions[83](index=83&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=23&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 FY2024 financial results, highlighting a **5.2% decrease** in net sales, improved gross margin, and the pending Sonoma-Cutrer acquisition [Overview](index=25&type=section&id=Overview) Premier luxury wine producer outlines growth strategies: market share gains, portfolio evolution, channel expansion, and strategic acquisitions - Key growth drivers include gaining market share, evolving the product portfolio, expanding **wholesale** and **DTC** channels, and making strategic acquisitions[90](index=90&type=chunk) Key Financial Metrics (in thousands) | Metric | Q1 FY2024 | Q1 FY2023 | | :--- | :--- | :--- | | Net sales | $102,509 | $108,171 | | Gross profit | $53,853 | $54,710 | | Adjusted EBITDA | $34,713 | $35,665 | [Results of Operations](index=31&type=section&id=Results%20of%20operations) Q1 FY2024 net sales decreased **5.2%** (lower volume); gross margin improved to **52.5%**; SG&A expenses rose **18.4%** (acquisition costs) - Net sales decreased by **$5.7 million (5.2%)** in Q1 FY2024, mainly due to negative volume contributions across all sales channels[125](index=125&type=chunk) - Gross margin increased to **52.5%** from **50.6%** in the prior-year period, attributed to cost of sales improvements and lower discounting[127](index=127&type=chunk) - SG&A expenses increased by **$4.7 million (18.4%)**, largely due to higher transaction costs for the pending Sonoma-Cutrer acquisition and higher depreciation from the Geyserville winery purchase[128](index=128&type=chunk) [Non-GAAP Financial Measures and Adjusted EBITDA Reconciliation](index=33&type=section&id=Non-GAAP%20financial%20measures%20and%20adjusted%20EBITDA%20reconciliation) Net income reconciled to Adjusted EBITDA, a non-GAAP measure, slightly decreased to **$34.7 million** in Q1 FY2024 Adjusted EBITDA Reconciliation (in thousands) | Line Item | Q1 FY2024 | Q1 FY2023 | | :--- | :--- | :--- | | **Net income attributable to The Duckhorn Portfolio, Inc.** | **$15,537** | **$19,815** | | Interest expense | 4,004 | 2,162 | | Income tax expense | 5,629 | 7,087 | | Depreciation and amortization expense | 7,329 | 5,757 | | **EBITDA** | **32,499** | **34,821** | | Transaction expenses | 3,236 | 162 | | Change in fair value of derivatives | (1,889) | (368) | | Other adjustments | 867 | 1,050 | | **Adjusted EBITDA** | **$34,713** | **$35,665** | [Liquidity and Capital Resources](index=34&type=section&id=Liquidity%20and%20capital%20resources) Liquidity includes **$21.2 million** cash and **$402.0 million** available credit; operating cash flow decreased to **$18.1 million** due to working capital - As of October 31, 2023, the company had **$21.2 million** in cash and **$402.0 million** in undrawn capacity on its revolving line of credit[140](index=140&type=chunk) - Cash needs are greatest during the harvest season (August-November), and existing cash and credit facilities are deemed adequate for the next **12 months**[141](index=141&type=chunk) - Net cash provided by operating activities decreased by **$8.3 million** year-over-year, driven by lower net income and changes in working capital, including higher inventory levels[149](index=149&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Market risks include interest rates on **$241.3 million** variable debt and foreign currency, with grape prices remaining unhedged - The company has **$241.3 million** in variable-rate debt; a hypothetical **100 basis point** increase in interest rates would increase annual interest expense by **$2.4 million**[164](index=164&type=chunk) - Foreign currency risk is managed using foreign exchange forward contracts for barrel purchases from France, typically with a duration of up to **twelve months**[166](index=166&type=chunk) - The primary commodity risk is the price of grapes, which is not hedged and is subject to factors like weather, demand, and harvest yields[168](index=168&type=chunk) [Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of October 31, 2023, with no material changes to internal control - The Chief Executive Officer and Chief Financial Officer concluded that as of October 31, 2023, the company's disclosure controls and procedures were **effective**[171](index=171&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[172](index=172&type=chunk) [PART II - OTHER INFORMATION](index=39&type=section&id=PART%20II) [Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently involved in legal proceedings expected to materially affect its business - The company is not presently a party to any litigation that is expected to have a **material adverse effect** on its business[175](index=175&type=chunk) [Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) Risk factors updated: potential failure to complete Sonoma-Cutrer acquisition and risks from CEO transition - A new risk factor is the potential inability to complete the acquisition of Sonoma-Cutrer, which could prevent the company from realizing expected benefits and may result in a termination fee of approximately **$5 million** under certain conditions[177](index=177&type=chunk) - Another new risk involves the recent CEO transition, which could create uncertainty, divert resources, impact performance, and has led to temporary non-compliance with NYSE audit committee independence rules[178](index=178&type=chunk)[179](index=179&type=chunk)[181](index=181&type=chunk) [Other Information](index=41&type=section&id=Item%205.%20Other%20Information) Three company officers established Rule 10b5-1 equity trading plans during the quarter Rule 10b5-1 Trading Plans Adopted in Q1 FY2024 | Name | Position | Adoption Date | Duration of Agreement | Aggregate Securities to be Sold | | :--- | :--- | :--- | :--- | :--- | | Pete Przybylinski | EVP, Chief Sales Officer | Oct 6, 2023 | Jan 5, 2024 - Jun 30, 2024 | 140,000 | | Zachary Rasmuson | EVP, Chief Operating Officer | Oct 6, 2023 | Jan 5, 2024 - Jun 30, 2024 | 48,000 | [Exhibits](index=42&type=section&id=Item%206.%20Exhibits) Exhibits filed with Form 10-Q include corporate documents and CEO/CFO certifications - The filing includes required certifications from the Chief Executive Officer (**31.1**) and Chief Financial Officer (**31.2**) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002[184](index=184&type=chunk) [Signatures](index=43&type=section&id=Signatures) The report was signed on December 6, 2023, by the Interim CEO and CFO - The report was signed on **December 6, 2023**, by Deirdre Mahlan (Interim President, CEO, and Chairperson) and Jennifer Fall Jung (EVP, CFO)[189](index=189&type=chunk)

Financial Performance - The Duckhorn Portfolio reported a revenue increase of 15% year-over-year, reaching $150 million for fiscal 2023[7]. - The company anticipates a 10% revenue growth for fiscal 2024, driven by new product launches and market expansion efforts[7]. - The gross margin improved to 45%, up from 42% in the previous year, reflecting better cost management and pricing strategies[7]. Sales and Marketing Strategy - Direct-to-consumer (DTC) sales grew by 20%, contributing to 40% of total revenue, highlighting the effectiveness of the DTC channel strategy[7]. - New product offerings in the ultra-luxury wine segment, priced at $25 or higher, are expected to enhance brand positioning and attract affluent consumers[7]. - The marketing strategy includes continued expansion of the direct-to-consumer (DTC) channel, which may present unforeseen risks and challenges[20]. Growth and Expansion Plans - The Duckhorn Portfolio plans to expand its vineyard acreage by 15% over the next three years to increase production capacity[7]. - The company is actively pursuing strategic acquisitions to enhance its market presence and diversify its product portfolio[7]. Sustainability and Technology - The company has invested $5 million in technology upgrades to enhance supply chain efficiency and improve customer experience[7]. - The Duckhorn Portfolio is focused on sustainability initiatives, aiming for a 25% reduction in carbon emissions by 2025[7]. Risks and Challenges - The company faces competitive pressures from an increasing number of market participants, which may impact future growth[7]. - The company faces risks from inclement weather, drought, pests, and plant diseases that could adversely affect grape quality and availability, impacting business operations and financial condition[9]. - Increases in labor costs and shortages may negatively affect the company's ability to manage operations and execute strategic objectives, potentially harming financial performance[9]. - The company has incurred substantial indebtedness and may not generate sufficient cash flow to meet debt service requirements, which could hinder growth strategies[9]. - The company is subject to regulatory reviews and audits that could result in adverse rulings, impacting financial condition and future prospects[9]. - New environmental requirements and market pressures related to climate change could materially affect business operations and financial results[9]. - The company may face challenges in securing adequate supplies of agricultural and winemaking materials, which could impact production capabilities[9]. - The company must navigate risks associated with supply chain disruptions and the impact of the COVID-19 pandemic on operations and financial condition[13]. - A reduction in consumer demand for wine, influenced by demographic shifts and decreases in discretionary spending, could materially impact the company's operations and financial results[20]. - The company is heavily reliant on distributors for wine sales, and a significant reduction in distributor demand could adversely affect sales and profitability[20]. - The company may not be fully insured against catastrophic events, which could lead to material financial losses[22]. - Changes in foreign and domestic laws and regulations could increase costs or limit the company's ability to sell wines in certain markets[22]. Internal Controls and Governance - The company is obligated to maintain effective internal controls over financial reporting, and any failure could negatively impact investor confidence and stock value[9]. - TSG Consumer Partners LLC continues to exert significant influence over the company, potentially limiting stockholder decision-making power[9]. - The company must maintain effective internal controls over financial reporting, as any failure could negatively impact investor confidence and stock value[22].