Naked Wines ($WINE) update – The Good, The Bad and the Ugly

Disclaimer: this s not investment advice. PLEASE DO YOUR OWN RESEARCH !!!

Naked Wines released their full earnings last week and the result was a full disaster with the share price down a whopping -43% despite the fact that the headline numbers were already known. It is a good reminder that even being down more than -60% from its top, a stock can still fall another -40% on one day. Although the stock was only a 2,9% position prior to that drop, it still warrants a deeper dive than usual.

The signs were already obvious

Before moving to the actual numbers and the report, I have to criticize myself for not acting on the stock despite the following issues that I had identified already some time ago:

  1. “Thesis Creep”
    My original investment thesis was a bet on the Naked Wine founder Rowan Gormley. Unfortunately, I never really “refreshed” my opinion of the company when Rowan had to step out end of 2019. That was clearly a mistake.
  2. Informational disadvantage
    These days, for almost any online retailer, very specific credit card details seem to be available for anyone who will pay certain “service providers” some money. So a significant part of the institutional investors have almost a “real time” view on sales and a clear information advantage to retail investors like me. Thus has been bugging me for some time and that is why avoided other E-Commerce or retail stocks to a certain extent, but I didn’t act on this for Naked.
  3. Overemphasis on (BS) alternative Performance measures
    As a lot of other “growth” companies, Naked has introduced a lot of alternative performance measures. Many of them in my opinion don’t lead to better understanding but were rather used to make things look better than they actually are. A good example is the “stand still EBIT” which should show profitability if the company doesn’t grow anymore. Now as the company doesn’t grow, stand-still EBIT is shown at 20 mn USD, “real” EBIT is zero.
  4. Investor base
    Another observation where I didn’t act enough on was the fact that among the investors more and more “hot hands” appeared. Especially the Lightstreet pitch in November turned the stock into a “hot stock” which is something I try to stay away from as far as possible. I sold some but unfortunately not enough.

If I put all these aspects together, I should have clearly acted on Naked Wines earlier or at least I should have dedicated more time into analysis.

The report & numbers

Following one of my favorite “Wild West Movies”, I would summarize my takeaways under three categories: The good, the bad and the ugly.

The Good:

the good

On the positive side one can list:

  • Naked indeed showed a GAAP profit after two years of losses
  • Sales and “active angels” still grew slightly  in 2021/2022 despite a tough “Covid comp”
  • Gross margins and contribution margins stable despite inflation pressure
  • The CEO still aims to “double the company within the next 5 years”
  • Some reflections on mistakes made (e.g. failed low price strategy in the UK etc.)

The Bad:

the bad

  • Excessive use of alternative Performance measures (including 2 year growth rates etc.). Why do they show a “standstill EBIT” of 20 mn when EBIT in the current stand-still mode is only 2 mn ? In addition, using suddenly 2 year growth rates is honestly embarrassing
  • Inventory increased significantly, soaking up a large portion of the cash balance. The explanation (supply chain issues) does not fully explain the amount. It rather looks like over stocking, similar to Target & Co
  • Sales in the most important market US actually decreased
  • General costs have significantly increased without a real good explanation or some rather bad explanations (Marketing R&D)
  • Acquisition cost seems to have increased dramatically, leading to a significant lower payback, also retention rates have declined
  • Outlook for 2022/2023 is “muted”. On the surface they say that they expect more or less unchanged sales

and the ugly

the ugly

  • I have to say that I am still irritated about the “going concern” section on page 31 of the Document. A company only writes something like this if someone (usually the auditor) has concerns. This is how this reads

    On this basis the Board believes it is appropriate to prepare the financial statements on a going concern basis. However, this material uncertainty may cast significant doubt on the Group’s ability to continue as a going concern and therefore to realise its assets and discharge its liabilities in the normal course of business.

  • In combination, the resignation of 2 board members on the date of publication, which as far as I understand was not planned, also puts another question mark on top of this case
  • Although the new 60 mn credit line should lower any liquidity risks, the covenants that are coming with this are clearly not positive, especially as they mention that in a downside scenario, they might break the covenants.

Some thoughts:

Some investors clearly got scared from what they heard or read. This is from an FT article from yesterday:

Wayne Brown, an analyst at Liberum, said the company’s forecasts for 2023 reflected “the poor quality of customers acquired [in the last financial year]” and said the balance sheet was also a concern. “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 in a note to clients.

The numbers and the outlook do not look great or at least not as great as Management wants to make them look. Clearly, almost all other D2C E-Commerce companies have the same issues but in my opinion Naked should have done better than that.

I am mostly disappointed that capital allocation is clearly not as good as they always claim. The fact that for instance they increased investment into new customers in the UK where margins are lowest and decreased investments in the US and Australia with higher margins does not look good.

Overall, I also question that they invested so much money into gaining new customers despite rapidly decreasing economics. Yes, they promise to correct that but I would have assumed that they can react quicker. I assume they wanted to increase sales and number of angels as a priority which in my opinion is not good capital allocation. They could have scaled back and maybe tried to find a better way to invest this money instead.

Their stated policy, to invest all cash produced into acquiring new customers now seems a little bit too simplistic.

The growth strategy also doesn’t sound so convincing. Trying to bring back old members as a “new strategy” brings into my mind the saying “no shit Sherlock”. I would have assumed that this is part of the toolkit already.

The Webcast

I also listened to the Webcast which I found quite weak. The CFO should be fired outright as he states that granting options to employees is “Not a cost” but that they are “Very exited” about it and “perfectly aligned” with share holders. My feeling is that they not act as owners but very clearly as “agents”. This is also confirmed by the statement that they “of course” will not return any cash to share holders.

According to management, the Going concern section had to be included because they failed a stress test scenario from the auditor. They sounded relaxed but in my opinion they shouldn’t. In the past, cash always had been higher that customer deposits. In 2021/2022 however they seemed to have used these deposits to finance inventory, which clearly adds significant operational risk. One major risk with customer deposits for Naked Wines is that they promise a direct refund at any time as stated on their website:

You can cancel your Naked Angel Account at any time, and get your money back – with no penalty whatsoever (see point 9).

The big risk here is that if Naked Wines, for whatever reason, would get into real trouble, the probability of a “bank run” is high. If you, as a client, have any doubt at the credit worthiness of Naked Wine, you will pull your deposit unless you forgot about it. I think that is the reason why the Auditors rightfully assume that in case of problems, Naked needs to cover the deposits with cash and not hard to sell inventory.

Interestingly they mentioned that they sold some London real estate after the end of the FY and already drew on the credit line which is clearly an indication that the Auditors pushed them really hard.

Another low light was the comment with regard to the covenants of the credit line. It is the job of a CFO to negotiate covenants in a way that they are not breached so easily and that’s the reason why you negotiate credit lines in good times and not when you really need them.

With regard to inventory, management claimed that what happened is “re-stoking”. In March 2020 (pre Covid). Naked had ~70 mn GBP in inventory on 200 mn trailing sales, or 35% of (trailing) sales. Currently, at 350 mn sales, they have 140 mn of inventory which translates into 40% of sales. So this is clearly more than re-stoking. In addition they mention that inventory might even increase in 2022/2023 which clearly points to problems. Maybe they have over-committed to Wine Makers ?


For the Year 2022/2023, Naked expects the following “mid point” estimates: 350 mn GBP Sales, G&A of 46,5 mn GBP, Contribution from existing customers of 88 mn GBP, cost for new customers of 35 mn GBP  and extra costs of 9 mn GBP for “Maketing R&D” and Equity incentive. If I plug in these numbers, I get to this forecast in comparison to 2022:

21/22 22/23
Sales 350 350
Contribution exist 86,2 88
Investment news -41,3 -35
G&A -43 -46,5
Extra cost 0 -9
EBIT 1,9 -2,5

So maybe this has in addition to the going concern freaked out investors even more: Naked is spending less on new customers but costs are increasing even more. These is clearly a weak outlook. For a company that does not grow, cost discipline is really important and it is clearly not visible in this outlook.

It is also proof, that the “stand still EBIT” is pure BS. This will be the second “stand still” year with no profit of all.

One positive aspect is that I think that indeed, Naked could be hit less by a recession that stationary wine trade as they might have higher income customers that don’t need to cut down so much.

What to do now ?

This is very difficult. Naked has become a small position for me. So at some point in time I would need to decide to either increase or sell. I still believe that the underlying business is good (not great) but it needs to be well managed.

For me, the current management hast lost a lot of credibility and I am not a 100% sure that they know what they are doing. They clearly have a cost problem that they don’t address  and granting themselves 4 mn of equity at the current valuation, not cutting any costs and telling investors to swallow it, doesn’t sound right.

I think what would be needed now would be a tough activist investors and either a tough supervisory board and/or new management to make sure that they take this more serious. There is of course also the possibility that a strategic buyer might show up.

With regard to valuation, I would be very cautious to deduct any cash on the balance sheet from the valuation as long as it is smaller than customer deposits. As mentioned above, especially in a potential hard recession, this cash could disappear in a second if customers loose trust.

For the time being, I am on “aggressive watch”. I haven’t given up yet, but in the current set-up, i am also not prepared to allocate more money into them either, despite the relatively low valuation. I am looking for real change, otherwise I would sell into a potential “relief rally”-


  • A disastrous news release yesterday. The Punch Card guy is out after a few weeks and the absolutely have no problems with Loan covenants.

    Should have sold back then. Sold today. Maybe exactly wrong timing but “Expected return on Brain damage” is not high enough.

    Hopefully a lesson well learned for the future.

    • Waited a day to do anything or comment: the statement yesterday was a bit vague but does point to credit issues and profitability (also read: shift away from growth). The Punch Card guy leaving with immediate effect is clearly a bad signal. Also they’re likely going to sell a 10% stake of a very illiquid stock. No way this is going back to 200p anytime soon.
      Also, your post in July did sound like you wanted to sell but after seeing a stock go from 850p to 200p it’s not easy. Lesson learned and we all make mistakes but … doesn’t feel good anyway!
      Anyway, thanks for the update and being transparent on selling. Kind of agree that the return/brain-damage ratio is not great now.

      • By the way the lesson I learned is that if I own something that has 4-bagged, I’ll sell, unless it’s either a *very* high quality business or still cheap (on real metrics, not “standstill” bs).
        I wanted to keep that 4 bagger (how else you get to a 10 bagger) but was looking at it through rosy lens.

  • Long-time follower here and only argued once when you considered (bought?) Silver Chef. If you’re not confident enough to add and see so many red flags, I would get out.

    I missed your initial post or would have warned you as well. Large accounts on twitter are pushing around this idea and the same accounts who own this own a bunch of other stuff which they consider contrarian. I consider them wishful thinkers who cannot read a cash flow statement.

    • yeah, Silver Chef was another one of my big fails. No reason to hide it. Reacted too slow on that one either.

      • I wouldn’t a call it a big fail. You live and learn. We all make mistakes along the way. I for one applaud you for recognizing some mistakes made, which you can then avoid the next time.

        Kind reminder that these are difficult times given the many structural vs Covid one offs. Personnally took the easy way out and avoided all Covid beneficiaries as I am not smart enough to know what’s structural.

  • In this environment, even reasonably undervalued companies can become much more reasonably undervalued! I suspect another bout of downside volatility will create a nice crop of “deep value” names especially in the small cap space. IMHO of course!

  • Actually, as I said in my previous comment, it’s not appropriate to compare 2021 with previous years since that was an abnormal year and it would be a highly misleading comparison. If you look at metrics like Repeat customer sales per angel (it went from 267.7 in FY 2017 to 326.8 in FY 2022) or the repeat customer contribution margin per case (it went from 23.4% in 2018 to 34.1% in 2020) you can see how they are scaling. Also, you have to consider that Naked has shared economies of scale, so this means the company is passing cost savings to its angels (lower angel prices with 22% average saving rate per each bottle, delivery prices are a fraction compared to the industry and this last cost advantage ultimately improves wine quality leading to “better wine for less money”). Moreover, shared economies of scale bring another competitive advantage which is network effect: lower prices gets passed to angels which brings more angels and those new angels increase the number of orders and consequently volume and a bigger volume allows for higher price discounts which get passed again to angels and the cycle goes on and on as it feeds on itself. What I’m trying to say is that it’s better to look at the business over a long term horizon and trying not to be confused by short term thinking (1-2 not as aspected years) and noise.

    • Also, you specifically wrote that G&A and acquisition costs dramatically increased and that is not true as I wrote in my yesterday’s comment. I don’t know what you mean by defining the management team “creative” but even if you add those $5M to investment in new customers you would always have a smaller number (41.3 + 5M in 2022 against 50M in 2021). So this means that you provided false information misleading at the same time your readers.

      • I am not sure what you are referring to. Yes, they “invested” slightly less into marketing last year but have not achieved a lot for this, mostly they achieved a “standstill” where in theory this should result in 20 mn EBIT.

        So again, I do not understand why I have provided “false information” and/or misled my readers.

        Per GPB/USD of incremental return, they had to invest significantly more than in prior periods.

    • Yes, if a company produces enough alternative KPIs, there will be always some who look good. And what you describe as a Network effect is a simple scale effect and for some reason, they don’t scale very well.

      With regard to short-term thinking: I own this stock now for 6 years. I

  • Happy I did not buy your thesis … nor the stock. Industry never seemed highly profitable (thanks TerrySmith for teaching us some basics). Too much OpCosts. If it would be highly profitable, this would be seen in other competitors. Not the case. I also did not bite on some of your Erdös-lev.1-2 contacts. Wondering when will Tilman do a Video update. The guy is quite honest, yet was quite silent lately… Anyhow, you can always rely on NakedWine for the ultimate: cheap wine. With a sufficient amount, you will always manage to forget about your troubles.

  • Great post!
    Love your questioning of your actions & management / their honesty: pitching SBC as no cost was always wrong from a shareholder perspective*, but they seem to have not been updated about shareholders caring again about it; and checking inventory levels is important I believe (even more since reading Quality of earnings).

    * together with your other points of not acting as owners but sth else (agents, salary receivers?) this is a pretty dim view on management

  • Rüdiger Soukup

    Danke, für die Analyse…. ich habe noch letzten Freitag verbilligt, hätte es mit der Kenntnis Ihres Beitrags aber mutmaßlich nicht gemacht!

    • Vielleicht liege ich ja komplett falsch und er Kurs steigt ab heute wie eine Raktet 😉

      • Everything that irritates us from others, reveals a lot about ourselves

      • I am sorry you only welcome cheerleaders of your investment thesis in your blog. A proper rationale why WINE wasn’t a good bet was provided in my post, yet you just disqualify it. But hey, you are right, I better go to places where there is freedom of speech.

        • In fairness, it is his blog, his idea, his original post and his mea culpa.
          1) At no point he labelled any of this ground for debate!
          2) His track record is otherwise very good. His bearishness on uranium lately for example has proven right
          3) You can disagree with more tact I guess. If you share your disagreement in public, expect them to be refuted.
          4) Blogs like this have an echo-chambering element whether we like it or not.

          Again, so far so good. Let’s encourage the author for posting for free instead of shooting them down. Twitter is littered with half baked idea on shitty micro caps for the sole purpose of front running followers. Ain’t happening here at least and let’s congratulate the author for not being tempted in this form of theft.

  • So much care in reassessing the issues, almost more than in analyzing new investment opportunities. The learning effect is, of course, enormous, and I am curious to see how the invested funds have reacted. But only the quarterly reports, which may start rolling in at the end of July, will show that

  • Very good review! My approach, when I have a very small position in something that is dubious in some way, is to just sell. This is just to avoid spending the time and mental energy on it. Otherwise they distract me from bigger issues. I might put in a good til cancel order if I don’t have another use for that money immediately. Anyway, appreciate your posts. Best,Steve

  • the £76m of “Deferred Angel and other income” line in their liabilities it’s also effectively cash that has been paid in advance by Angels. So net of these £76m, the company’s net cash of £40m turns into a net “debt” position of £36m.

  • Good write-up. I am amazed at how much gunck comes out when we do a personal review on a (avoidable) loss.
    Thesis Creep and “institutional investors have almost a “real time” view on sales and a clear information advantage to retail investors like me.” are take-aways for retail me.

    Do you have a pre-purchase / post-mortem checklist?

  • Norbert Lou is in the stock so you are in good company.

    I had a look at it but the very first thing I did was sign up to get the initial case to try it. All six bottles were awful. And meant to be their best stuff. I didn’t take it any further because if your product sucks ultimately it will catch up with you.

    • Thanks for the comment. The problem with wine in my opinion is that a “good wine” means very different things to different people.

      • True but in the spirit of Keynes’ beauty contest, I could also not imagine anyone else liking this stuff (or anyone else believing anyone else would like it). It was truly awful stuff.

        • I have some questions related to the „bad“ section. You wrote that General and administrative costs „have significantly increased“, but if you consider those costs as a percentage of revenue they represent 12% of sales (12% in FY20 and 11% in FY21) there is no significant increase whatsoever. With regards to explanations, the management team said that those costs represent investments in customer experience and technology and also they are part of what they believe is the right move to achieve „a large degree of cost leverage“ over the long term.
          Another confusing point is the one regarding acquisition costs. You stated that „acquisition costs seems to have increased dramatically“, but investment in new customers, which is the sum of new customer contribution loss and advertising costs, decreased by 17% YOY (but up 76% 2YOY) with a 1.5x 5-year forecast payback. I don’t see any dramatic increase in that regard. Also, the retention rate (88% in FY21 and 80% in FY22) decrease should be put in perspective since during the past years people were at home and as Tabak said in the earning call they were ordering a lot more often. This means is not appropriate to compare FY22 with FY21 for the previous reason.

        • Some answers to your questions:
          – in theory, with increasing sales, G&A should “scale” and get smaller in percentage points. At Naked, they even increase. So it doesn’t seem to scale well
          – They got creative and booked 5 mn “marketing R&D” into G&A. Without that trick, advertising spend would have been higher and acquisition cost would have been higher.
          – A 1,5x payback over 5 years is not good. They say themselves that it should/need at least t o be 1.75x
          – going from 88% retention to 80% is significant. 20% churn compared to 12% churn means that your customer stays only 5 years on avg compared to 8,3 years (1/0.12).
          – I discount a lot what Mr. Tabak said in this call due to his stupid comment on the “cost of options”.

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