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DP

Duckhorn Portfolio, Inc. (NAPA)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 FY2024 delivered resilient profitability despite muted top line: net sales $92.5M (+1.4% YoY), gross margin 55.6% (+20 bps YoY), adjusted EBITDA $37.7M (+5.3% YoY; margin 40.8%) .
  • Mix tailwind from Kosta Browne DTC shift into Q3; however, net income fell 20.7% YoY to $13.3M ($0.12 diluted EPS) on higher interest, taxes and depreciation tied to prior acquisitions .
  • FY2024 guidance updated: net sales $398–$408M (incl. ~$16M Sonoma‑Cutrer), adjusted EBITDA $146–$150M (low end raised), adjusted EPS cut to $0.56–$0.58 on higher share count/taxes; diluted shares to 123.5M; tax rate 27–29% .
  • Catalysts/Narrative: distributor network realignment may create short-term shipment/depletion unevenness but is intended to enhance execution; Sonoma‑Cutrer synergies lifted to “up to $10M,” supporting 2025 profitability .

What Went Well and What Went Wrong

  • What Went Well

    • Margin expansion: gross margin +20 bps YoY to 55.6%; adjusted EBITDA margin +150 bps YoY to 40.8% on cost discipline and mix .
    • Strategic progress: Sonoma‑Cutrer closed on April 30; synergy outlook raised from ~$5M to “up to $10M,” with complementary Chardonnay-led positioning .
    • CEO tone on execution and portfolio strength: “operational excellence enabled us to maintain strong performance… adjusted EBITDA margin of 40.8%” (Mahlan) .

  • What Went Wrong

    • Top-line headwinds: wholesale-to-distributor net sales declined 11% amid softer demand and retailer purchase normalization; on-premise programs uptake slower .
    • Kosta Browne underperformance: softer response to appellation series; management diagnosing consumer behavior shifts and retention/purchase cadence .
    • EPS pressure: net income down 20.7% YoY; updated FY EPS lowered to $0.56–$0.58 given higher interest, tax rate, and share count post Sonoma‑Cutrer deal .

Financial Results

MetricQ3 2023Q2 2024Q3 2024
Net Sales ($USD Millions)$91.2 $103.0 $92.5
Gross Profit ($USD Millions)$50.5 $58.3 $51.4
Gross Profit Margin (%)55.4% 56.6% 55.6%
Net Income ($USD Millions)$16.8 $15.9 $13.3
Diluted EPS ($USD)$0.15 $0.14 $0.12
Adjusted Net Income ($USD Millions)$19.0 $20.7 $16.3
Adjusted EPS ($USD)$0.16 $0.18 $0.14
Adjusted EBITDA ($USD Millions)$35.8 $42.7 $37.7
Adjusted EBITDA Margin (%)39.3% 41.5% 40.8%

Segment mix (net sales % of total):

Channel MixQ1 2024Q2 2024Q3 2024
Wholesale – Distributors77.0% 62.1% 60.4%
Wholesale – CA Direct-to-Trade15.6% 18.9% 16.0%
Direct-to-Consumer (DTC)7.4% 19.0% 23.6%

Key KPIs:

KPIQ2 2024Q3 2024
Cash And Equivalents ($USD Millions)$13.1 $15.7
Total Debt ($USD Millions)—$315.3
Net Debt / EBITDA (Leverage Ratio)1.9x 2.1x

Notes: Distributor inventory days on hand exited Q3 “above our expectations of 65 days” due to constrained demand forecasts . Non-GAAP metrics exclude items such as equity-based compensation, purchase accounting adjustments, transaction and integration costs, and derivative fair value changes; reconciliations provided in filings .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Sales ($USD Millions)FY 2024$395–$411 (excluding Sonoma‑Cutrer) $398–$408 (incl. ~$16M Sonoma‑Cutrer) Maintained midpoint; organic lower
Sonoma‑Cutrer Net Sales ($USD Millions)FY 2024n/a~$16 New (added)
Adjusted EBITDA ($USD Millions)FY 2024$145–$150 $146–$150 Raised low end
Adjusted EPS ($USD)FY 2024$0.63–$0.65 $0.56–$0.58 Lowered
Diluted Share Count (Millions)FY 2024115–116 123.5 Raised
Effective Tax Rate (%)FY 202425%–28% 27%–29% Raised

Q4 Illustrative detail (management slide): implied net sales $100–$110M incl. ~$16M Sonoma‑Cutrer; organic net sales $84–$94M; YoY organic −16.1% to −6.1% and, excluding Kosta Browne timing shift, −7.4% to +2.5% .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2 and Q-1)Current Period (Q3 2024)Trend
Macro/Consumer demandLuxury wine outpacing total wine; cautious 2H outlook given industry headwinds Luxury wine down ~1% in Q3; normalization in retail/wholesale purchase behavior; management sees stabilization signs Stabilizing/slightly soft
Product innovationDecoy Featherweight Sauvignon Blanc and Decoy Limited Paso Robles Cabernet highlighted as 2H growth drivers Featherweight quickly became 8th largest domestic luxury Sauvignon Blanc label; encouraging reorder rates Positive early adoption
Kosta Browne (DTC)Timing shift from Q4 to Q3 communicated Underperformance vs expectations; consumer purchasing cadence changing; action plan in development Needs remediation
Distribution networkStrategy to expand/accelerate wholesale distribution Comprehensive realignment underway; expect short-term shipment/depletion unevenness over next two quarters Short-term volatility; long-term positive
Sonoma‑Cutrer integrationAccretive strategic rationale; ~$5M cost synergies targeted Closed Apr 30; synergies upgraded to “up to $10M”; compelling luxury Chardonnay complement Upgraded synergies
On-premise programmingPlanned by-the-glass relaunch in 2H Slower uptake; on-premise sales dipped in Q3 Weaker than planned
Depletions/inventory—April/May showed two consecutive months of “good depletions”; distributor inventory DOH above 65-day target Improving depletions; elevated DOH
Cost/marginsMargin expansion cited; cost control emphasized Gross margin +20 bps YoY; adj. EBITDA margin +150 bps YoY; careful OpEx management Sustained margin discipline
Interest/tax—FY interest expense ~$18M; tax rate 27–29% Higher than prior view

Management Commentary

  • “While top line results were impacted by the softer wine market, our ongoing commitment to operational excellence enabled us to maintain strong performance in the third quarter, with an adjusted EBITDA margin of 40.8%.” — Deirdre Mahlan, CEO .
  • “We initially forecast approximately $5 million in cost synergies [from Sonoma‑Cutrer]… now expect to be up to $10 million.” — Deirdre Mahlan .
  • “These changes [distributor realignment]… will help fuel increased focus and investment… we anticipate some unevenness in the phasing of shipments and depletions over the next 2 quarters.” — Deirdre Mahlan .
  • “Adjusted EBITDA was $37.7 million… margin improved 150 bps vs prior year… we continue to carefully manage operating expenses.” — Jennifer Fall Jung, CFO .
  • “We expect interest expense of approximately $18 million and our tax rate between 27% and 29%… adjusted EPS of $0.56 to $0.58 on 123.5 million diluted shares.” — Jennifer Fall Jung .

Q&A Highlights

  • Consumer dynamics: Management attributes slowdown to post-COVID normalization and retailer purchasing changes; sees stabilization rather than worsening trends in recent months .
  • Inventory and guidance: Guidance assumes distributor inventories are brought back toward targets as realignment proceeds; inventories currently above 65-day target .
  • Kosta Browne: Brand equity remains strong; issue is purchase cadence/club retention behavior post-pandemic; plan to refine offers, timing, and retention strategy .
  • Q4 range variability: High/low outcomes driven by timing of orders and distributor transitions; some shipment shifting into Q1 FY2025 possible .
  • Depletions: April and May showed two consecutively “good” months consistent with ambitions; cautious on declaring victory .
  • Sonoma‑Cutrer: ~$16M expected in Q4; do not extrapolate full-year from Q4 due to seasonality and distributor changes; bulk synergies realized in FY2025, no revenue synergies assumed yet .

Estimates Context

  • Wall Street consensus via S&P Global could not be retrieved for NAPA due to a Capital IQ mapping issue in our data connector; therefore, EPS and revenue estimate comparisons are unavailable at this time [SpgiEstimatesError for NAPA].
  • Given the unavailability, we anchored performance versus prior year and prior quarter from company filings and call materials.

Key Takeaways for Investors

  • Margin resilience stands out: gross margin and adjusted EBITDA margin expanded despite soft demand; cost control remains a lever if wholesale weakness persists .
  • Expect near-term shipment/depletion volatility from distributor realignment; Q4 organic growth ranges are wide, and some orders may slip to Q1 FY2025—position sizing around prints should reflect timing risk .
  • EPS guidance reset reflects higher shares/taxes/interest post Sonoma‑Cutrer; this can pressure near-term sentiment, while upgraded synergy outlook supports FY2025 margin thesis .
  • Watch Kosta Browne remediation: improving DTC conversion/retention and offer timing are key to stabilizing DTC contributions alongside broader tasting-room spend strength .
  • Innovation traction: Decoy Featherweight’s strong early adoption provides incremental growth in premium ($15–$25) segments outperforming sub-$15 wine; follow reorder velocity and distribution breadth .
  • Operating metrics to monitor: distributor inventory days on hand trending down, depletions durability post April/May, and on-premise program uptake recovery .
  • Medium-term: Enhanced network alignment plus Sonoma‑Cutrer integration (upgraded synergies) should support execution and scale benefits; valuation reaction likely tied to evidence of depletions normalization and Q4 ordering cadence .

Additional references:

  • Q3 press release and presentation including detailed reconciliations and FY2024 guidance .
  • Prior quarter results and guidance framework (Q2 and Q1) for trend context .
  • Acquisition closing details and governance updates (CEO appointment; Board changes) around quarter end .