Shares in Naked Wines collapsed by 40% on Thursday after its full-year results disappointed. The wine company’s gloomy outlook statement spooked investors after chief executive Nick Devlin said that it would only achieve break-even this year due to inflationary pressures.

The share price slump came despite the company returning to profit, posting pre-tax profits of £2.9 million following last year’s losses of £10.7 million. Total sales rose 5% at constant currency rates to £350 million.

Naked Wines’ proposition works by connecting customers – or ‘angels’ as it dubs them – with independent wine makers. Consumers then gain access to wines directly from the producers at a discounted price.

Naked Wine faces “inflationary challenges”

The company was one of the pandemic’s winners as many new customers signed up when pubs and bars were closed during lockdown. However, with a possible recession looming and the cost of living crisis, there could be difficult times ahead.

“In the past year we moderated investment responsibly as we navigated inflationary challenges,” group chief executive Nick Devlin told investors. “In that context, I’m pleased with the substantial growth in sales to repeat members supported by sales retention above our expectations for the year at 80% and our ability to deliver profitability."

However, while he said that the company is “well positioned to continue to grow amidst a changing consumer environment,” he added that management would not “pursue growth at any cost” and that it intended to "trade the business at or around breakeven this year.”

Devlin added that he believed this was the “responsible balance to strike in FY23, mindful of the levels of macro-economic uncertainty, but also of the opportunities we see ahead and the potential for disruptive models like ours to gain traction in tough times as consumers revaluate their purchasing choices.”

Balance sheet concerns

The company’s net cash position more than halved to £40 million from £85 million in the previous period. Management also said it took on a $60 million credit facility at the year-end, which included covenants. However, inventory assets rose to £142 million from £76 million in the previous year.

While total group sales are anticipated at £345 million to £375 million for the full-year 2023, Naked Wines says it expects to spend up to £40 million on acquiring new customers. What’s more, the company will also be incurring administration costs of £45 million to £48 million, as well as £5 million in marketing and £4 million in share-based compensation fees.

Profit from repeat customers is anticipated at £83 million to £93 million, however.

In a note to clients, Wayne Brown, an analyst at broker Liberum, voiced concerns about the “poor quality of customers” the company had picked up in the past financial year and its balance sheet.

“There is a risk heading into a downturn that weak demand and potential cancellations combine to force the company to discount stock more in an attempt to turn the inventory into cash,” he wrote.

The shares are down 79% in the past year to 156.5p and 82% on their pandemic highs of 874p.

While the shares may look oversold at these levels, wine is a discretionary spend customers may decide they need to cut back on in the face of a recession.

Piper Terrett | Financial writer, London
28 June 2022

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*Based on revenue excluding FX (published financial statements, June 2020).