Naked Wines (LSE: WINE) released its quarterly earnings report earlier today and revealed that sales have not caught up to the company’s more hopeful projections. Management claims that customers returning to bars, pubs and restaurants is responsible, leading to fewer people drinking at home. Naked Wines’ shares had already been on a downward trajectory this week, but today’s news turned that slide into a tumble. The price fell from 678p all the way to 525p before lunchtime. But, despite this setback, I’m still bullish on the company.
Solid fundamentals
Naked Wines saw a near parabolic rise over the course of the Covid-19 pandemic. By sheer chance it had gone through a period of serious restructuring, closing its stores and moving entirely online, which left it poised to take full advantage of our extended stay at home.
It has excellent profit margins on most of its products as well as exclusive access to the majority of the wines it sells. It also operates a partial subscription model which continues to bring in revenue even as sales slump.
In fact, while the words sales slump may be billboarded on most articles about it, sales still grew by 1% over the past six months. While this number isn’t anything to write home about, growth is growth and year on year, Naked Wines has actually grown 68% between now and 2020. Gross profit margins have increased from 38% to 40% in that same time.
Subscribers have also grown by 25%, meaning that Naked Wines is continuing to attract new customers even as the majority of people are choosing to spend their money out in bars.
Why the crash?
I believe that we are seeing a share price contraction only because the price rose too high too quickly. Investors tend to get excited when they see percentage growth in the double digits, but a company needs to maintain that growth to justify its share price. If results fall short of expectations, shares tend to fall.
This is exactly what we have seen today. No losses, no shrinking, just a failure to meet high expectations.
Winter outlook
Company management seem sure that the holiday season will bring sales back on track. Large family gatherings are, in my experience, best enjoyed with ample access to alcohol. And who knows, another lockdown may well trigger a boost in orders. Or the novelty of drinking in a bar may wear off if food and drink prices continue to rise.
But no one can be sure of what the future holds. It may be that as fuel and food prices rise, people choose to end their subscriptions or cut back on luxuries. If this happens, then the share price may continue to fall.
Is now the time to buy?
When I last wrote about Naked Wines, I said that I wanted to wait and see how an end to lockdowns would affect sales. I was right to steer clear then, but is now the time to add it to my portfolio?
Adding it is a risky move, but I think the fundamentals are all here.
This winter is make or break. If Naked Wines can, at the very least, hold onto its subscriber base, then I think this price correction will stabilise around the 500p mark. If it can increase its subscribers over the next six months, then I think we will see a more sustainable increase in the share price.
James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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