The Duckhorn Portfolio: Demand Is Unlikely To Recover Anytime Soon

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].