Last month, Naked Wines (WINE) reported FY22 results and the stock declined 50%. We’ve been following Naked since it was spun out of Majestic Wine and have covered the company from many different angles:

1. IP Interview with the Founder and Former CEO of Naked

2. IP Interview with Current CEO of WINE

3. IP Analysis on H1 22 Update

4. IP Interview on History of US Alcohol and Spirits Distribution

5. IP Interview with Former CEO of WINE International

6. IP Interview on Vivino vs Naked

In this piece, we will review WINE's FY22 results, analyse the outlook, and reflect on lessons we've learned.

We believe there are three core drivers of WINE’s business:

  1. Sales retention
  2. Contribution profit margin
  3. Year 1 Payback

WINE’s sales retention declined from 88% in FY21 to 80% in FY22. On the surface, 80% retention is impressive for any non-SaaS business. However, this doesn’t tell the full story. Naked reports H1 numbers and then FY results; it doesn’t break out H2 numbers clearly.

Sales retention declined to 80% in FY22 and Year 1 payback declined to 59% in H1 22 from 82% the prior year.

Source: IP, WINE Annual Report
Source: IP, WINE Annual Report

Management believes the lower sales retention is due to higher inflation and lower consumer confidence. We previously highlighted why the payback and new customer growth is declining:

WINE acquired 61,000 customers in H1 22 and 17,000 in H2 22. The second potential reason for the slower growth in H2 could be the iOS changes that distorted Facebook’s ROAS. Also, WINE’s major marketing channel is vouchering: inserting discount vouchers inside e-commerce boxes. Not only has competition for inserts inside popular ecommerce retail boxes increased, but the overall volume of boxes shipped online has decreased as the world reopens. - IP Analysis, May 2022

The repeat contribution profit margin also declined 260bps from 29.9% in FY21 to 27.3% in FY22. In H2 22, the repeat contribution margin hit a 4-year low of 26.3%. This is mainly due to higher fulfilment costs and raw material inflation.

All three of the core drivers of WINE’s unit economics deteriorated in H2 22.

These metrics are important as together they determine the marketing spend required to achieve a certain level of growth. This ‘replenishment spend’ flows through the income statement and is the marketing expenditure to replenish the contribution profit from churned customers.

Source: Naked Wines FY22 Report, In Practise
Source: Naked Wines FY22 Report, In Practise

The higher the retention, payback, and margin, the lower the replenishment spend required to replace lost customers. This leaves more marketing expenditure to be spent on acquiring new customers to grow.

The table below shows the replenishment spend as a percentage of total marketing spend over the last 5 fiscal years. In H2 22, over 75% of the allocated marketing spend was used to replenish lost customers. Using management’s guidance, if the retention and payback is similar to H2 22, 85% of the forecasted marketing spend will be used to replace lost customers. This highlights why management is forecasting no revenue growth.

Source: Naked Wines FY22 Report, In Practise
Source: Naked Wines FY22 Report, In Practise

But what happens if the three core variables decline further in FY23?

This is clearly what the auditor was concerned about. The going concern remarks highlight how uncertain both management and the auditor are around future sales retention and repeat contribution profit.

What is even more alarming is the fact that management raised a $60m ABL which could breach its covenant in the first quarter:

A downside scenario resulting in a 7.5% to 20% sensitivity against the base case forecast for Repeat Customer sales could result in a breach of this covenant. When taking into account actual trading results to date which are below forecast, a downside scenario of 3.7% against forecast would result in a breach of this covenant at June 2022 and as a result of the sensitivity in the downside scenario, management have identified a material uncertainty on meeting this covenant. - WINE, FY22 Report

If we assume all other variables are equal to H2 22, even if FY23 sales retention declines to 70%, WINE would lose ~30,000 angels, or 3% of its subscriber base. The uncertainty and lack of visibility over future customer behavior led to the going concern remarks that put WINE’s liquidity at question.

The cohort chart below illustrates the uncertainty predicting future sales retention: 65% of WINE’s contribution profit is from cohorts 2020-22.

Source: Naked Wines FY22 Report, In Practise
Source: Naked Wines FY22 Report, In Practise

Newer cohorts are also churning faster: the average 5-year retention for cohorts 2013-9 is 50% yet the 2-year retention for FY20 cohort is 58%.

Source: Naked Wines FY22 Report, In Practise
Source: Naked Wines FY22 Report, In Practise

The uncertainty lies in the fact that the majority of WINE’s profit is driven from new customers acquired during a pandemic. And now the company is facing the most challenging macro environment in its history.

This puts the company’s solvency in question.

WINE’s balance sheet has always been tricky to manage. The company uses angel deposits and grower and winemaker payables to finance its inventory. The challenge is that angel deposits are not true corporate cash; similar to a bank run, deposits can be withdrawn at any time, for free, by angels. If customers were to withdraw their deposits, this would leave a whole in WINE’s balance sheet.

WINE has £142m in inventory financed by £76m in deposits, £54m payables, and now a £50m ABL. Surprisingly, management expects to see an inventory working capital outflow in FY23 as it increases product availability. However, if growth slows further, reducing inventory is an effective lever to manage the liquidity of the company.

If we work through the free cash flow, it seems like there needs to be a large ‘bank run’ scenario or material degradation in the sales retention for WINE to become insolvent. Management aims to breakeven on an EBIT level in FY23 (excluding the £4m in cash compensation). We estimate WINE will burn between £10-15m in FY23.

Source: Naked Wines FY22 Report, In Practise
Source: Naked Wines FY22 Report, In Practise

This is hardly optimal but it’s manageable. Naked also has opportunities to improve reactivation rates and increase prices which drive higher repeat contribution profit.

In summary, like many other ecommerce companies, Naked needs to regroup and ensure it can survive the next 18 months without diluting equity holders. The company currently trades around book value; the market is questioning the ability of the assets to generate a required return beyond its cost of capital. We believe the company has a superior offering, it just needs to survive to be able to reap the benefits of the value it can add.

A few other observations and lessons from following WINE from £2.5 in the Majestic days, up to £9 last year, and back to £1.50 today:

Active trading around long-term positions

This is a topic we think about a lot and struggle with. How should we actively trade around our positions even if we want to hold the business for the long-term? We struggle with this because it implies market timing and we all know this is difficult. However, if you know the company well, flexing the position size as the environment changes can still be aligned with a long-term investment philosophy. It can also provide an edge to size positions up and down to benefit from price volatility.

In May, we discussed the challenges Naked was facing in acquiring new customers. We were also seeing other retailers struggling with inflation and lower sales growth. An online wine retailer is clearly not immune to such macro factors and it was sensible to flex the position size well before FY22 results. One major lesson for us is to not be blindly loyal to companies, but flexible enough to actively size positions accordingly. Let volatility be your friend.

Stand still EBIT and non-IFRS metrics

Many argue the stand-still EBIT number is bullshit because the company isn’t growing today and yet EBIT is negative. This is true. But the stand-still EBIT is supposed to be a ‘terminal’ period metric. One which is used when the business is mature and has penetrated the target market. This clearly isn' the case for Naked today. We shouldn’t value a company off such a metric, but it doesn’t mean the business can’t generate significant FCF at scale. The question is whether the business can indeed reach $1bn in sales over time, or if today really is the terminal period for WINE.


One reason we have taken an interest in WINE is because it seems to follow a ‘scale economies shared’ approach similar to Costco or AMZN. WINE aims for 1.75x-2x LTV / CAC to ensure it passes on enough value to both winemakers and customers. This low return means it’s hard to compete with WINE and that others in the ecosystem also win.

This is great, but adds far more fragility than companies with higher LTV / CAC. As we’ve seen from the FY22 numbers, any macro headwind puts far more pressure on companies with lower margins. Especially a DTC wine company. COST’s June sales numbers have grown double digit for the last 3 years. This is because COST offers a wide range of essential products at great prices that attract customers in tough times. Does a low-but-quality online wine offering provide the same resiliency as general merchandise from COST or AMZN?

Probably not. Although the lower LTV / CAC is attractive competitively, macro headwinds can lead to fragility in the model. This also emphasizes why actively flexing position size in such investments is important. It also highlights how incredible COST is