Naked Wines plc (OTCQX:NWINF) Q4 2022 Earnings Conference Call June 23, 2022 9:00 AM ET
Company Participants
Nicholas Devlin – CEO
Shawn Tabak – CFO
Conference Call Participants
Mark Irvine-Fortescue – Stifel
Andrew Wade – Jefferies
Benedict Hunt – Investec
Charlotte Barrie – Berenberg
Nicholas Devlin
Ladies and gentlemen, thank you very much for joining us today and welcome to the Presentation for Naked Wines Financial Year ’22 Results. I’m going to start off by giving you a little context, and then I’ll hand over to our CFO Shawn Tabak, who’ll take you through the details of the financial results. And then I want to talk to you some more about the outlook for financial year ’23, and our long term growth plans.
So firstly, a reminder about the problem, we exist in Naked Wines results. The wine industry, it’s one of the oldest industries in the world, don’t know where it is on that ranking, but it’s high up. But it has some fundamental problems and Naked exists to try and bridge those. And it’s hard, we’re looking to solve problem for two stakeholders, for winemakers and for consumers.
On the winemaker side, the biggest challenges we see, are barriers in terms of access to capital. Put simply, making wine is expensive. Scaling a business if you’re an independent wine maker, and delivering growth is very capital intensive. And then secondly, the challenge around distribution. And this is most acute in the U.S. market, which is our largest market where we see our largest addressable market opportunity. And that is that a very small number of gatekeepers control access to most retail points of distribution in the U.S. So even if you make great wine and have the financing to produce that, getting your product in front of customers is very challenging.
On the consumer side, we see often an illusion of choice, retailers offering hundreds of products, but maybe produced predominantly by three or four large producers. We also see that a lot of times what you pay for the consumer isn’t the direct cost of production, especially in the U.S. where the three tier system adds a lot of intermediary cost and Americans pay more for wine than consumers do anywhere else on earth. So we think consumers are not getting fair value for money.
And finally, I don’t think the wine industry has done a great job of responding to clear consumer desire for heightened provenance and a sense of the people behind the products they’re consuming. If you look, for example, the way the craft beer industry, has helped beer drinkers understand where their beer came from, who made it and why they’re passionate about it, I believe there’s a real imperative for the wine industry to do that better.
Now at Naked, we look to solve these problems by bringing wine maker and consumer together. And when you do that, a few great things happen. For wine makers, we’re able to solve the first challenge that have access to capital by supporting them, harnessing the power of nearly a million members globally, we’re able to provide winemakers with the capital they need to get started, and indeed, to finance the growth of their brands as they’re successful.
We do that in a unique way that preserves for them a sense of autonomy and making wines they’re truly passionate about, and we do that in a way that enables them to access great reward. And that’s a unique combination for winemakers.
We also then solve the second problem. Our wine makers make brands exclusively for Naked Wines with a guarantee of sale. That means we solve their challenge around distribution. And those products are exclusively available to our angel members. In doing that for consumers we’re able to offer greater value for money. And because they’ve helped to make these wines possible and because we’re selling directly with no intermediaries, we’re able to offer amazing quality and much better value than the market. And consumers get access to exclusive wines from world class winemakers and have a direct connection to them being able to chat backwards and forwards on our app, meet them in person at events like our tasting tour going on in the UK as we speak. We call that a unique wine proposition.
And it’s working at scale. We’ve built Naked, over 10 years in the U.S. and Australia and 14 years in the UK to be the world’s largest direct consumer wine business. We have nearly one million active angels around the world and have grown group revenue to 350 million pounds. What we’re doing is working and it’s proven at scale.
Now I’m going to come back and talk to you a little bit more about our plans for FY23 later. I’m going to hand over now to our CFO, Shawn, who’s going to take you through the detailed financial results for FY22. Over to you, Shawn.
Shawn Tabak
Thanks, Nick. I’m going to start out by highlighting some of the key performance themes that we saw from our fiscal year 2022.
Overall, Naked Wines continues to disrupt the wine industry with a superior value proposition for both winemakers and consumers. We’ve come quite a long way in building what today is a preeminent online wine marketplace. And we still have significant opportunities to grow and scale the business by capturing more of our estimated $25 billion total addressable market and we look to do so by investing intelligently in customer acquisition, and our value proposition, we persistently employ a data driven focus on unit economics.
In fiscal year 2022, Naked Wines delivered continued increase in total sales on top of significant acceleration that we saw in the business in the prior year. Overall, we once again increased our subscriber or active Angel base, and achieved strong repeat customer sales retention of 80%.
Looking at our top financial KPIs. Group Sales was 350 million pounds, which was a 5% increase over the prior year on a constant currency basis, or 3% on a reported basis, and was driven by strong demand from existing members. We’ve significantly increased the scale of the business over the last few years and continue to increase total sales in fiscal year 2022.
On a two-year stack basis, group sales increased 78% on a constant currency basis. Repeat customer contribution profit was £86 million relatively flat with the prior year, driven by 13% increase in repeat customer sales on a constant currency basis and offset by higher logistics and transportation costs due to the global supply chain disruption.
We invested £41 million in acquiring new customers, which was less than we did in fiscal year 2021, when we accelerated to capture the decrease in acquisition costs during COVID-19 lockdowns. To put our fiscal year 2022 investment levels in context, it was 76% higher than we did in fiscal year 2020. And importantly, we delivered adjusted EBIT profit of £2 million, driven by a strong demand from existing numbers and strong expense control.
Turning now to costs. Gross profit was £142 million with a gross margin of 40%, which is a 60 basis point increase over the prior year, driven by a higher mix of repeat versus new customer sales, as well as improvement in Australia gross margins.
Fulfillment costs as a percentage of total sales were slightly higher in fiscal year 2022 at 18% of total sales versus 17% in the prior year. The increase was primarily driven by increased logistics and transportation costs. During the year we implemented automation in our UK distribution center and remodeled our U.S. distribution network.
The ladder resulted in additional non-recurring costs of approximately £1.1 million to transport inventory from our legacy Napa warehouse to four warehouses that are closer to both our distribution centers and our customers.
Advertising costs were 10% of total sales, which is a 270 basis point decrease over the prior year, that primarily reflects lower new customer investment spend than initially planned due to the challenging market environment and lower five-year payback of customer cohorts, which I’ll talk about in more detail shortly.
General and Administrative costs were 12% of total sales, a 160 basis point increase over the prior year, reflecting investments in technology related costs to improve the customer experience and investments in strategic initiatives to drive growth and the customer proposition.
Shifting now to repeat customers, which are subscription customers or Angels that have made their first monthly subscription payment. Repeat customer sales was £315 million, a 13% increase over the prior year on a constant currency basis, or 11% on a reported basis, and driven by enhancements to our customer proposition with a broader range and the addition of more talented winemakers to our platform.
Repeat customer contribution profit was £86 million, resulting in a 27.4% margin, which was a 250 basis point decrease over the prior year. Driven by higher storage, transportation and logistics costs in the U.S. and UK, as well as non-recurring costs for the U.S. distribution network remodel, and offset by higher margins in our Australia business unit.
Repeat customer Sales retention was 80% which was above our expectations. We had 9,64,000 active angels at the end of fiscal year 2022, which was a 9% increase over the prior year, reflecting the strength and the proposition with a strong comparative to the prior year.
You can see here that our margins have improved compared to fiscal year 2020. Benefiting from the increase scale in the business and offset by the inflationary cost environment that we saw in fiscal year 2022.
Here you can see the impact of our gross margins improving and offset by higher fulfillment costs in the business driven by the global supply chain disruption and the resulting increases in transportation and logistics costs.
This slide shows the group contribution profit by cohort and percentage contribution retained in fiscal year 2022. As mentioned, our strong consumer proposition is driving high sales retention in the business. And those loyal customers are driving a solid base of contribution profit.
Of our £86 million pounds a repeat contribution profit in fiscal year 2022, only £10.8 million was from cohorts that we acquired in the year. The remaining 87% was from cohorts that we acquired in prior years.
It’s also worth noting that we retain a high percentage of cohort contribution profit year-over-year, and we find that retention improves as the cohorts age. This year, the contribution profit that we retain was less than in prior years, driven by the year-over-year decrease in margins due to the global supply chain disruption. Said differently, the revenue retention of these billboards is similar to prior periods with even higher year-over-year cohort retention.
And this strong retention I’ve just talked about leads to cash flow from our customer cohorts. We have generated strong returns on our investment spend over the past 10 years, with cumulative contribution profit of £350 million on £190 million of initial investment. That means we’ve generated over £190 million of contribution profit in excess of our investments over this timeframe. And importantly, all of our cohorts from FY13 through fiscal year 2021 have already paid back.
Standstill EBIT shown here is the adjusted EBIT that we report if we had only invested in new customers to replenish the current customer base, rather than for both replenishment and growth. Standstill EBIT was £21 million pounds. Additionally, in response to feedback from shareholders, we’ve added an additional standstill EBIT calculation, which uses a trailing three-year simple average for sales retention and year one payback.
To help normalize these metrics from the variations that we have seen over the last few years due to the pandemic related lock downs. On this pro forma basis, standstill EBIT totaled £27 million.
Turning to our key performance indicators for our investment in new customers. Our business model is built around investing in new cohorts of customers, and then earning a return on that initial investment over the lifetime of the customer cohort. To acquire new customers, we incurred a costs in the form of a discount that we provide on the purchase of a first case of wine, and then we also incur advertising costs as well.
In fiscal year 2022, investment in new customers was £41 million, compared to £50 million in the prior year, reflecting new customer contribution loss of £7 million and advertising costs of £34 million. The five year forecasts of payback for fiscal year 2022 cohort was 1.5x below our prior year five year forecast payback of 2.6x, driven by changes in the consumer environment, as well as higher performance marketing and fulfillment costs.
Overall, we’ve seen an improvement in the five year forecast of payback of cohorts acquired in the second half of fiscal year 2022. However, we have also seen two changes mostly to cohorts acquired in the first half of the fiscal year.
First, as our cohorts have aged, we have seen higher churn early in the consumer lifecycle than our models initially predicted. In the UK, in particular, we believe we have an opportunity to move toward a higher value trial offer with lower discount and ultimately acquire a higher value customer than we did in fiscal year 2022.
Second, we also updated our models to reflect lower contribution margin during what we expect to be continued supply chain disruption period. Together, these two changes decreased our LTVs, which impacted payback by approximately 30 basis points.
Turning now to look at our fiscal year 2022 results by our three main geographies, the U.S., the UK and Australia. Starting here with sales, the U.S. is our biggest market opportunity and our largest business with total sales of £157 million pounds, representing 45% of the total group. In the U.S. repeat customer sales increased 11% on a constant currency basis over the prior year.
We expect to see a continued shift toward the U.S. segment as we continue to take market share in the U.S. Our U.S. business is currently approximately 1% of the total addressable market in the U.S., and we see an opportunity to significantly increase our penetration in that market.
Total UK sales were £147 million, and total Australia sales were £46 million.
Moving on to segment profits. The U.S. delivered the highest repeat profit of £47 million with a margin of 34%. That was also the highest of the group due to the three tier distribution system in the region that drives higher prices.
U.S. repeat customer contribution margin declined 330 basis points year-over-year, impacted by higher storage, transportation and logistics costs as well as the U.S. distribution network model. We have the most pricing power in our U.S. market with embedded competitive and scale advantages and expect to see margins return over time.
We invested £23 million pounds and acquiring new customers in U.S. a decrease over the prior year based on the changing market conditions and inflationary costs environment.
In the UK, repeat customer contribution profit totaled £28 million, with an investment in new customers of £14 million. In Australia, we set out the year focused on improving the unit economics as a basis for increasing our growth investment there. Our approach was to improve the unit economics driven by price increases across the range, as well as through rationalization of the wine in the portfolio.
As a result, repeat contribution margins increased 240 basis points over the prior year. We continue to invest in opportunities across all geographies, to support sustainable and responsible growth of the business.
And now onto the balance sheet. We ended the year with a strong balance sheet and cash on hand of £40 million. Having restock we also finished fiscal year 2022 with £142 million of fantastic wine inventory.
We also added a $60 million headline credit facility with a syndicate of banks led by Silicon Valley Bank. This facility allows us to borrow against our U.S. base inventory and will provide additional liquidity to the business.
Over the next 12 months we expect to continue to increase inventory levels, which the credit facility can be used for as needed. Free cash flow used in fiscal year 2022 was £44 million, primarily driven by restocking of our inventory levels following lower inventory levels at the end of last fiscal year.
As a reminder, our capital allocation philosophy is predicated first on maintaining sufficient cash and liquidity to operate the business given the seasonality in our inventory, purchasing cycle and our sales. From there we allocate capital toward growth investments that generate a return in excess of our internal hurdle rate. After that, if we identify that we have excess capital, this will be returned to shareholders.
Given the growth opportunities in front of us, we’re not proposing any distributions or returns of capital to shareholders at this time.
Looking ahead, we’re focused on executing against our core growth strategies, investing in the business and attractive returns and increasing shareholder value over the long term. With this in mind, we plan to continue to evolve our market leading offering in fiscal year 2023 to deliver a superior value proposition to both consumers and winemakers while focusing on improving the early life retention and conversion of new customers.
At the same time, we’re focused on optimizing our early life consumer offering to drive customer acquisition at scale, and investing to build brand awareness, perception, trust and comprehension of the Naked Wines value proposition in all of our markets.
There are a few themes that are relevant to our fiscal year 2023 guidance. First, we have seen and has continue to expect a measure of enduring inflationary pressure in all markets. Second, consumer sentiment has been impacted by inflation and the geopolitical environment, which we expect to continue to some measure.
And finally, as we shift our UK business towards a more premium offering, we expect to invest approximately £5 million less in new customers in that market with resulting in relatively flat year-over-year sales. As we’ve repositioned the customer base toward a higher quality revenue.
Given the current macroeconomic environment, we expect to manage to break even adjusted EBITDA, excluding share based compensation and non-cash terms.
Additionally, given this uncertainty, we are providing the following guidance. Total group sales ranging from £345 million to £375 million, which is a year-over-year change of minus 4% to plus 4% on a constant currency basis.
Investment in new customer acquisition range of £30 million to £40 million, repeat customer contribution profit range of £83 million to £93 million. General and administrative costs range of £45 million to £48 million. And additionally, we expect to invest £5 million in marketing R&D, and incur £4 million of share based compensation charges.
And now I’ll hand it back over to Nick to cover our strategic plan.
Nicholas Devlin
Thank you very much, Shawn. And about the fourth time we’re doing this remotely and I’m still struggling to unmute myself. So some of us Neverland.
I want to talk about three things in this section. Firstly, I want to draw out a few important themes that sit behind the numbers Shawn just walked us through for fiscal ’22. Then I want to talk to you a little more about the way as a management team, we intend to be operating the business over the course of fiscal ’23. And particularly in light of some of the market context that Shawn talked about there when reviewing guidance. And then I want to talk about our strategic growth initiatives.
So firstly, onto the observations on fiscal ’22. I think for me, there are three really important things to draw out here. Firstly, our proposition continues to resonate with members and I think in some ways, the headline numbers obscure this, the level of repeat sales growth this year was very encouraging. We saw slower growth in repeat contributions, we saw some unusual margin pressure. But the sales retention number again, 80%, is ahead of our expectations. And we’re very pleased with that.
That’s really important because we’ve doubled the size of the business and the additional members we brought in, appreciate what we’re doing. They love that they’re getting better quality wine for their money and a direct connection to winemakers.
The second theme is around us doing what we say we’ll do in terms of investment, we’ve always promised to be data lead in terms of where we invest, and in the course of this year, as we’ve not generated the return that we have in the past and that we seek to deliver. But we’ve pulled back our level of investment, spend and manage the business delivering a beat two expectations at an EBIT level for the year and profitability. We’re going to talk more about those investment challenges shortly, and what we’re doing to address them.
And finally, and I think really importantly, it’s been a year where we’ve made material progress in enhancing the quality of the wine range and our appeal to winemakers. And I want to highlight a few things in particular on that point. So firstly, just a little color behind the way in which the proposition has resonated this year.
I think one really interesting angle to look to is the growth we’ve delivered in revenue per active Angel. In FY21, we took a material step up here, and that wasn’t surprising for a number of our members during lockdowns, there was a step up, there was excess purchasing effectively. And there were a lot fewer out of home wine consumption occasions more in our consumption occasions.
The fact that we’ve been able to deliver a beat to that in FY22, I think really speaks to the continued momentum we have in terms of both the proposition itself and in particular in terms of the range we’re offering to our members, the fact we restored availability to our target range during the course of the year. Candidly, we didn’t expect to be able to repeat the 320 we deliver in FY21 and delighted to see us take a step forward in FY22 here. It’s a great evidence that the underlying proposition really resonates.
And you can see that as well, in terms of some of the recognition we’ve continued to receive. In particular, I’m delighted to see the recognition in awards that are voted for by members of the public. In both the UK and the U.S. recently, we’ve picked up awards as being the number one wine specialist proposition.
But I think it’s really important to talk about one of the challenging numbers in this year’s results, which was the fact that about 1.5 times, the level of payback we have projecting on our investments in FY22 and new customers is both below the levels we’ve achieved historically, and below the levels that we target to deliver. I’ve talked a number of times in the past about a Goldilocks range for this, which will be somewhere in between 1.75 and 2.25 times payback. Two higher payback, and we’re probably failing to deploy enough investment. And two lower paybacks, we’re not creating sufficient value at each investment.
There are a couple of reasons and Shawn talks to these in his section as to why we fell below that historic level of payback. One of them is somewhat exceptional. We saw negative movements in our repeat contribution margin year-over-year this year. And if you zoom back out and look at the trend, we’ve got a long and consistent record of being able to expand repeat contribution margin, and I believe over the medium term, we will return to doing that.
However, in the way our models work, we conservatively project forward the margin rate we’re at. And that is having an impact on the payback level we’re projecting currently. But I think it’s really important that we don’t hide behind that as the only reason. I think even without that, we would have been at best at the bottom end of that Goldilocks range maybe slightly below.
We have seen some pressure in terms of marketing cost inflation. And in particular, in the first half of the year, we were not fast enough to respond to changes in consumer behavior as customers exited locked down. And consequently, we paid more than we should for some customers.
One of the things that’s really important is that we have taken action to correct that. And as we exited the second half of the year, and in particular in the fourth quarter, we saw payback levels returning to that Goldilocks range led by strengthening performance in our U.S. market, which is particularly important. I’m going to talk a little bit more about some of the tactics we’re deploying to drive that improvement in a second.
I think if you wanted to take a step back and think about the types of levers we’re using, and the way in which we think about managing our growth investments, and how that varies across market, I think that’s also helpful.
In the UK, in particular, we think our market positioning is an important lever or an important thing we need to review in order to make sure we’re delivering both good payback now, and the prospect of continued and sustainable growth in that market.
What’s happened over the course of the last 18 months is that we have maintained price points for longer than a number of our competitors. And one of the challenges that’s led to is actually in the UK market, we found ourselves as the lowest priced online wine specialist proposition. And that attracted a group of customers into the business who were overly price sensitive or price led. That’s difficult, because it’s hard to monetize those customers on ongoing basis. And you tend to see much higher levels of churn. And Shawn talked about in his section.
We’re taking active steps and indeed have already taken steps in the UK to correct that to move the business back to what I think is its right positioning, showcasing the world class wine we’re producing from great independent winemakers and attracting customers who are looking for yes, great value for money better wine that yet elsewhere, but not in absolute price lead customers.
You’ll see that flow through into the balance of spend or investment between media and paying money to third parties could be Facebook could be a partner is inserting art vouchers versus first order losses, or put a different way, you’ll see an improvement in the margin we generate on new orders in the year ahead.
One other really important lever we’ve got one that is controllable is choosing to redeploy some money that historically we’ve spent as marketing dollars into investing in the early customer experience. And I think we have an opportunity to create real leverage or improvement in our cohort economics by deploying more resource and more focus against translating customers from traffic to initial trial. But then really focusing on the quality of our first 90 days. I’m going to talk about that initiative in a second.
Now over time, it’s important to put these results into context. Typically, as you’ll see, we tend to generate a higher five-year payback in reality than we initially project. And you’ll see returns across each of the last five years FY17 through ’21 actually sit materially above our Goldilocks range. So we do have a good reason to believe — no reason believe we won’t see a similar kind of evolution on the FY22 cohort.
Turning to the next theme around the winemaker appeal and the strength of our wine range. I’m really delighted to see a number of improvements here, not least because these are often the dividends of work that we have done over multiple years in partnership with our winemakers. Today, we’re working with 266 winemakers around the globe, an increase of 13%, including conversion of a number of winemakers we initially worked with as part of our COVID relief wine fund.
We’ve highlighted here the number of awards and these are kind of top tier international awards, things like the decanter, world wine awards and IWC awards won by our U.S. range in the year. Increased by 721%, to 230%. In fact, we took over a quarter of the gold and platinum awards for U.S. wines, this year’s Decanter World Wine Awards. I’m delighted by this, I’m not surprised. We’ve always known we make great wine, but it’s great to see our winemakers getting that important critical recognition. It’s also helpful to be honest in terms of bringing new winemakers into the portfolio.
And it’s translating through to enhance quality perception, which is, you know, is a key metric that we track. And this says that even outside of our customer base, people are starting to understand the quality of wine we’re producing. And all of that is, is also supported by us, enabling our winemakers to build scale businesses. And you see the number of brands that are achieving material sales within Naked progressing, which I’m delighted to see.
And you can also see that just on a simple view in terms of total sales in the business per wine maker, which continue to increase.
One area that we’ve talked about a lot is the opportunity to deliver improvements or opportunity to enhance the range and to explore more premium price points and offerings. Again, this isn’t something you can do overnight if you want to work with winemakers to produce high quality products authentically from scratch. But I think in the last year, we’ve seen real evidence that our strategy is working and resonating.
In particular, in the U.S., you see a big jump in our key holiday quarter in the number of bottles of luxury wine, and that’s wine sold at over a $25 price point in our terminology that we’ve delivered. And with the number of bottles growing over 100%, there’s clear evidence as we produce these wines, there’s real demand within our customer base. I’m delighted to see that.
In Australia, you see the continuing growth in average order value, which is a result of the work to review the range and enhance the level of premium offerings, the team have been undertaking over a couple of years.
And all of that means that we’re able to unlock amazing talent into the business. And I wanted to highlight one of my favorite stories from the year on a winemaking front. I’m Rudy Von Strasser, who’s a bit of a Napa institution and he was one of the people who really single handedly almost helped create the diamond mountain AVA in the valley, has chosen to bring his Von Strasser brand exclusively to Naked. And it’s really exciting. It’s a brand that’s one winery of the year awards multiple times, tons of great scores and accolades. And now we exclusively available to make its members.
Together with Rudy, we’ve already generated over a million dollars of sales in his wines. And it gives us the type of brand that gives us an opportunity to stretch our price points, we sell a single wine yard calves for around $50 to $60. They’re amazing wines and continue at that price point to offer great value. Something like this sorry, breakouts my personal favorite, you should all get out there and buy it. I think there’s over $100 and when Rudy was selling through the three tier system, so proof that the model works that premium price points.
Turning now to our approach for FY23. And I think it’s important to give a little more context around how we’re thinking about operating the business.
Firstly, to think about some of the factors that go into that. And, we have been spending a lot of time looking at the macroeconomic indicators to understand how best we should be operating with business right now.
There are a few points that are important to draw out. Firstly, the wine category is a fairly recession resilient category. Typically, it’s relatively volume inelastic, i.e., put simply, people drink similar amounts in good times and bad. And if you look at the U.S. and UK markets in particular, during the last major downturn, the global financial crisis, both continued to see growth during the course of that period. What mainly you see if consumers changing buying behavior, whether that’s switching brands or switching price points.
Equally, we know that Naked model is resilient. In particular, and in the time that we operated a retail model in majestic and the DTC modeling Naked in the UK, we saw that the Naked model was much more resilient when consumer confidence was challenged. That’s partly because of the nature of the continuity, the subscription element of the model. It’s partly because of the high retention characteristics of the business that emotional connection to exclusive product.
You see that in our high sales, retention rates, net promoter score of over 60%, over 80% amongst long tenure customers. And our customer base is also relatively well positioned going into a period of economic uncertainty. It skews older, more affluent as a high level of homeownership. There are a number of reasons why we see the business as well positioned. But I think it’s really important to say that we are not in any way complacent. Whether you’re looking at inflation rates or consumer confidence metrics, there are generational challenges in some of those numbers. So we recognize those risks. And notwithstanding the fact that we think that the business and category is well positioned, we think it’s appropriate that we operate prudently in face of those.
So taking together in that context informs our intended trading approach. And the first thing here, obviously is responsible operators is to make sure that we are positioned to endure whatever level of magnitude of downside risk you might look at. And in light of that, Shawn talks about measures we’ve taken to reinforce our balance sheet, giving ourselves extra flexibility through negotiating an asset back lending facility, and making sure that we continue to preserve and create space for us to look for opportunity, as opposed to worry about having to manage through.
On top of that, we continue to monitor extremely closely customer behavior, and a market and cohort level to look for any early warning signs for changes in consumer behavior that might need for us to take further measures.
The second thing is to make sure that we continue to reinforce our key differentiators. And I believe that some of the market contexts may well offer material opportunity for Naked. Put simply, in recessions, consumers often change the way in which they buy products and services, people are much more likely to switch brand. And that’s exactly the behavior we need. We’re a 1% market share business with an extremely large $25 billion TAM, our challenge is convincing people they ought to do something differently.
So we’ll be looking for ways to amplify and share our message. And we making sure that we continue to apply that customer first mindset and reinforce both the rational differentiation better one for your money, but also the emotional differentiation of the native proposition.
And finally, I think it’s important so that we will continue to look for opportunities. And as consumer behavior changes, as I say, I think they will be material opportunities to Naked, we will continue to invest based on a data led approach and we will seek to deploy investment into channels and markets where we see good evidence of returns. It’s also I believe, continues to be a good time for us to pursue our thesis around brand investment. I’m going to talk more about that. But I think at a time when more consumers are reviewing purchasing behavior and are open to switching. And it’s actually a great time to communicate why make it a different way and a better way to do why.
And on that note, I want to turn to some commentary on our strategic growth initiatives. I think it’s important to start off with re articulating our philosophy here. We want to grow this business, but we want to grow it in a way that is sustainable and responsible. And at the heart of that means you’ve got to have really strong unit economics. As I said, we’re not happy or satisfied at all with the payback measure we delivered in the year. And we believe we can restore that to our long term Goldilocks range. That’s in our mind a prerequisite of growing the business responsibly.
But the best way to ensure you can ultimately deploy more investment and grow the business faster is to improve your underlying cohort economics. And I want to talk about a couple of areas of particular focus for us in FY 23. Firstly, some measures we believe that can help us better translate traffic regenerating into lifetime value. And secondly, some measures that we believe can improve our repeat contribution economics. And obviously, lifetime value is lifetime revenue times contribution margin.
In terms of our focus this year on improving the translation of traffic to LCD, there are three key initiatives as part of our FY23 strategic plan. The first of those is focused on enhancing the conversion rate. So getting more lifetime value out of the traffic we already generate. Here, we’re investing to increase the size of our marketing product team that is focused on that across markets, and pursuing hypotheses both around enhancing absolute conversion rate. Things like increasing the number of payment options we offer to customers empowered by implementation of a new payment processor, as well as looking at ways in which we correctly configure the right offer to the right customer.
Put it different way, we could also increase the lifetime value per unit of traffic if we dial back on necessary discounting to customers that we don’t want to incentivize as much.
Second area of focus is increasing the number of new member ads that come from either winning back former members, or effectively remarketing to leads that don’t convert first time around. I’ll talk to you in a minute about some of the early signs of success we’ve seen in that area of the back end of fiscal ’22.
Finally, I think we have a big opportunity in the first 90 days of our member experience. Honestly, on reflection and looking at the balance of resources we’ve deployed as a group, I think this is an area that we’ve got to acknowledge we’ve under invested in. In the year ahead, we’re actually, already, we’ve created a multidisciplinary team to focus exclusively on the first 90-day experience across our markets. We believe we have a material opportunity here to bridge from an introductory trial through to what becomes as you can see from our sales retention rate and extremely high retention model once customers get into the habit of making multiple purchases.
Turning briefly to some of the hypotheses behind that thesis on improving the first 90-day experience. In particular, we believe that through a combination of better personalization of indeed the initial first case of wine to different customer groups, some targeted use of offers and incentives. And using our storytelling ability to better showcase our differentiation and the differentiation of our Naked model earlier on, we can materially enhance conversion from first to second order. And in doing so we can achieve material leverage for our overall cohort returns.
I told you that we’ve been experimenting especially in the second half of the year with our remarketing efforts. You can see here that we delivered material traction, enhancing the percentage of member ads coming from the wind back of former members predominantly driven by efforts in the second half of the year. Indeed, that’s a key part of the reason why in the fourth quarter, we saw payback return to sit within that Goldilocks range.
Looking forward, we believe there is much more to go out here. And that we have an opportunity to drive this percentage to at least a third over the medium term.
And one of the great things about those types of efforts is it gives us another way to leverage our powerful proprietary machine learning models. Taking a look to the right hand side. Because we choose which former members to target for reactivation and what offers to serve to them, we typically generate materially higher lifetime value actually on a reactivated member than a first time sign up.
Now turning from the opportunity to better utilize traffic to repeat contribution. I think this is an area that we need to do a better job of explaining our philosophy and the opportunities that we have. As you can see, over the long term, we’ve expanded repeat contribution margin continuously over the last six or seven years. And then that took a step back in FY22.
Looking forward, we believe there are a number of levers we’re able to pull to address that and return to contribution margin expansion. Now I’ve said a number of times, I don’t believe in maximizing repeat contribution margin for the sake of it. I believe that a business’s strongest and most competitively differentiated when we share the benefits or economics around with all our stakeholders.
That said, it’s really important that our margins are sufficient to enable us to invest confidently in acquiring customers and continue to grow and scale the business. So with that in mind, in the year ahead, there are a number of actions we’ll be taking.
Firstly, as a vertically integrated production model, we have a lot of ability to determine the composition of our products. And whether that’s taking initiatives like our UK division have done to work hand in glove with winemakers to strip costs, you can’t taste out a product by light weighting bottles, or working with our winemakers to deepen collective sourcing pooling resources across more winemakers to combat price inflation, or redesigning the contents of products themselves and looking at the sourcing that goes into them.
Secondly, we’re a model that sells exclusive brands that are available only at Naked. I think this is really important. We know two things one, we can show that we have a measurable quality advantage. And secondly, our products are not available anywhere else, which means our pricing decisions are entirely our own. They’re not driven by others. And that that gives us an opportunity where we need to pass through price increases with limited impact on customer behavior. And you’ve seen that in our Australian division in the course the last 12 to 18 months.
The next thing to remember is because we have that measurable consumer surplus in non-consultants speak, we’re giving people better wine for their money. We do have some leeway and some opportunity to manage our promotional and our markdown and marketing investment to members. And we intend to do that. And that’s really supported by the ownership we have our sales channels 100% for wine is sold on our website on our app. And that gives us an opportunity to move nimbly to change the balance of the range and the mix and give us a number of additional levers if we think about the conversion of gross margin to contribution margin.
That’s it takes that out of the app strapped I think the best thing to do is look at what we’ve been able to achieve in Australia. And really here we have the perfect playbook, which will be rolling through the UK and U.S. divisions in the year ahead. We’ve been able to add 4.5 percentage points to the contribution margin in Australia this year, done in the face of an inflationary operating environment, and whilst maintaining really high levels of sales retention in that division. So we know what we need to do. And we’re working hard to implement that in the UK in the U.S., and you should expect to see progress on that in the course of the next financial year.
Finally, I want to turn and talk a little bit more about our marketing R&D investment, which this year is exclusively focused on furthering our hypotheses around the ability to scale Naked, responsibly through investments in brand marketing.
Now to recap the thesis here, we believe that over the medium term, by having more people understand what Naked stands for and how it’s differentiated, we will best be able to acquire the most high valuable customers and generate good returns on our marketing investment over the medium term.
For our first decade and a bit of operation, we’ve been almost 100% performance marketing business. And I think to achieve the level of scale that is possible for the Naked model, we will need to move away from that. But equally, we are a business that firmly believes in a testing based culture and making decisions based on evidence and proof. And the way we’re exploring our brand opportunity is consistent with that.
In the year just gone, we’ve learned a couple of important things. Most notably in Australia, we’ve proven that we can cost effectively change people’s minds. We have invested above the line in content featuring our winemakers and driven key things like comprehension of the brand, quality perception and trust.
Equally, in looking at the tactics we’ve deployed there, and some of the testing we’ve done in some regional U.S. markets, we’ve also seen that where we do that investment long, slow and consistently, we have better return than when we do that in a short big bang focus. So we’re taking some of those things into our plan for FY23.
Now, the approach we have for the year ahead is going to be different in each of our markets recognizing their different phases of development. In particular, for our two largest markets, in the UK, really, it’s around brand activity that’s supportive of our repositioning, and making sure we’re accentuating the quality of the winemakers we work with and the product we produce. And making sure that we’re driving the right brand association. Put simply, lots of people know Naked in the UK, but they don’t really know that much about us.
In the US the markets at a different stage. And our activity is much more focused on educating consumers about the benefits of going direct to consumer in general, and the superior value that a direct model is able to offer.
In both those markets, we’ll be deploying activity with clear control and test markets over a six-month period, which will enable us to do two things. It will give us accurate and measurable quantification of how much it costs to change people’s minds and how much we can change them by. And secondly, it will be able to show for us how does that investment then impact in turn on our performance marketing returns. And as you can see from the right hand side, I’m really excited that we will have meaningful testing over a half year period, where we look at a very different marketing mix.
As an example, consumers in the UK here in our test regions, we’re seeing roughly a 50-50 mix of spent between direct response or performance marketing, and brand marketing. And I think that will give us great insight to be able to build on. So the future marketing mix, it’s most appropriate to deliver high quality returns and growth for Naked.
So that’s all the theory, I’m also very excited about the content we’ve produced. And obviously a lot of the returns you get from brand campaigns come down to the quality of that content, you’ve got to still hear from our U.S. campaign, which is going to be quite fun, a little provocative and really directly talk to Americans about the reality of where your money goes to when you buy wine the traditional way in the U.S. And that is that most of it spoilers is not going to the person who made the wine, but it reflects the cost of that wine moving through a number of intermediaries before it gets to you. And we’re playfully bringing the middleman to life in some campaigns that are live as of now in our Denver and DC test markets.
Finally, I want to talk a little bit about how we’re thinking about making sure the business is able to scale efficiently. In the course of this year, we should see realization of benefits and deployment for a number of key infrastructure projects that we’ve been working on over the course of the last 12 to 18 months, including implementation of NetSuite a new payments platform which we’re currently in the process of migrating to, and some improvements to our underlying data infrastructure to make our powerful data assets more available in the business and able to power micro services in different parts of the customer proposition.
These have been important investments. And one of the challenges of scaling the business rapidly over the course of the last two years has been the requirement for investment in our infrastructure has been greater. I’m really pleased with the progress we’re making.
I think it’s also appropriate for us to consider how we set the organization in general in terms of how we operate up for efficiency. And as part of that, I’ve created a new role as part of our executive management team of group’s Chief Operating Officer. Essentially, the mandate is for the how? We know what we need to bring to life for consumers and winemakers. What we want to make sure we’re doing is the way we do that the way we operate as a team is as efficient and as scalable as possible.
The person we’ve appointed into that role as an internal candidate, Alicia Kennedy, who a number of you may know, formally, she was the managing director of our Australian division. Some of the reasons that I think Alicia is perfect for this, is the way in which he operated that business.
Operating with a very lean team, delivering a really impressive turnaround on key performance metrics over the course of the last two years, and building a really deep and ingrained understanding of the maker culture. I’ve been really excited to work with Alicia in the time that she’s been enrolled since the end of 2022. And look forward to her being able to drive both the way in which we do work, but also setting the business up to enable us to deliver more operating leverage over the course of the next two or three years.
So in summary, we have a really clear mission in Naked. I’m delighted that we are delivering on that mission at scale, and that in doing so we are delivering real value and benefit for our winemakers and our consumers. The results were delivered in FY22 demonstrate that that proposition is resonating and it’s performing.
For the year ahead, we have a clear focus on responsible growth. As we’ve guided will operate the business broadly to an EBITDA neutral perspective, we will be mindful of the overall economic and consumer outlook. But we will continue to take a balanced approach and where we see good opportunity to investment grow, we will absolutely take that.
Over the long term, we have a compelling growth path, we have a large underpenetrated TAM, and a genuinely disruptive business model that adds additional value for both winemakers and consumers. And backed by a long track record of strong proven unit economics. I’m really excited about taking that mission and showing it to more people and the prospects for Naked both over the year ahead, but over the longer term as well.
On that note, I want to thank you very much and we’re going to open up to Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] We can now take our first question from Mark Fortescue of Stifel. Please go ahead.
Mark Irvine-Fortescue
Hi, good morning everyone. Just a couple of questions, please, around working capital. And then also one on share-based payments, if that’s all right. On working capital dynamics, can you just clarify whether you ring fence Angels’ deposits at all to separate customer cash from company cash? It looks like customers are effectively funding working capital investment with the deferred income balance of £76 million being quite a lot higher than the group cash balance of £40 million.
And then maybe could you just help give some guidance or perhaps a range for the working capital movement you expect in FY23, given the guidance assumptions out there? On the share-based payments, I just thought that £4 million number that quite high…
Nicholas Devlin
Mark, should we answer your first two bits and then…
Mark Irvine-Fortescue
Sure.
Nicholas Devlin
We’ll do number 3 just — it’s still early in the states and 3-part questions might be beyond us. If I take the first bit, and then Shawn, if you can talk to the expected movement. The way we approach this, we don’t operate a dedicated ring fence to kind of separate segregated account for those Angel funds. But we put in place as a Board already clear treasury policy, which to make sure that we have sufficient funding in the group to cover any likely redemption of Angel funds. And we build that policy based on looking at historical behavior and then applying a multiplier to make sure that under any plausible circumstance, we’ve got plenty of cash available to meet any customer desire to take funds back.
Obviously, what you see from the business over the long term we have a very loyal customer base, very high rates of sales retention is actually the outflow of that customer on number tends to be very small. But obviously, we think it’s really important that we’ve got a robust process in place to give appropriate there.
And I’ll let Shawn talk a little bit to the second part of your question.
Shawn Tabak
Yes. Look, I think from a working capital perspective, we just take a step back. We ended last year with a strong balance sheet. We had £40 million of cash on the balance sheet. And inventory, importantly, of £140 million. Importantly, also, I think during the year, we restocked following lower levels of inventory at the end of last year when obviously, we had our 70% — approximately 70% growth year. So I think it’s important to think about all of these metrics together when looking at our balance sheet. And the net of all that is we end up with, I think, a very healthy current ratio if you look at the current assets and current liabilities that we have on our balance sheet.
Mark Irvine-Fortescue
That’s helpful. I suppose what I’m getting to is the going concern uncertainty that you’re flagging today. If your auditors can’t give you a completely clean opinion based on the working capital dynamics you’ve described, is that really the best model to fund the business?
Nicholas Devlin
Yes, happy to talk directly to that, Mark. I think the first thing that’s important to say is the accounts have signed off on a going concern basis and the management team very confident that’s the appropriate situation for them. In the real world, we’ve got a strong balance sheet to end the year with £40 million of cash. And as you see, the business, profitable in FY22 in terms of the main trading operations of the business has been kind of positive or cash neutral over the course of the last two to three years. So we’ve got a good amount of cash, our operations don’t burn through that cash.
Really what the flag raised in the audit process says is if you apply a severe downside scenario, which it’s important and prudent as part of audit works and if we didn’t choose to trade the business any differently, and we’ve got lots of levers we could pull. And if under that scenario, we no longer had access to any borrowing, then we could have — that’s where the disclosure comes from. I think that’s two or three hypotheticals on top of each other. I think in the real world, we’re confident about the level of funding we have in the business and that we have appropriate funding to deliver our plan.
Mark Irvine-Fortescue
Okay. And the last one is just on share-based payments. I think given all we’ve just talked about that £4 million number for the new financial year seems quite high. Is that just technical based on your models? Or is there anything you might expect on that?
Shawn Tabak
Yes, I can cover that. I think we are excited about the new equity program that the company’s — equity compensation program that the company is rolling out, which aligns the interest of employees with the creation of shareholder value. I think the important thing about that program is that it there’s no dilution or cost — real cost to shareholders absent an increase in the share price. And that’s because in the short term, the program includes the grant of stock options. So if the stock price doesn’t go up, then there’s no cost there.
The accounting requirements behind that are — require a share-based compensation expense irrespective of what actually happens after the shares are granted. And so you see that just flowing through there. But I think the key for us is that, that program very closely aligns the creation of shareholder value with actual equity value being shared with our employee base.
Mark Irvine-Fortescue
Got it. Thank you.
Operator
We will now take our next question. [Technical Difficulty]
Unidentified Analyst
Hi, guys. I had a couple starting with, you mentioned that you are continuously monitoring that if there are any changes in consumer behavior. So maybe if you could give some idea on what you have seen in the first quarter of the year? Have you seen any changes in any of the three geographies? And especially in context of the statement, I think that was mentioned in the going concern statement that you are currently running behind your forecast so far this year. So that’s the first, and I’ll come back to the second late.
Nicholas Devlin
Yes, happy to talk about. So we monitor a number of different variables, but primarily when looking to give and take, where we look at purchase rates or activation in our language and retention rates. Our people — so basically, are people buying? And are they maintaining their membership and making their monthly payments?
I think there’s nothing particularly unusual. We have a long-term trend to call out, and that’s why we’ve not made any particular disclosure here. I think fair to say that at the beginning of the financial year and in particular, sort of around end of March, early April in both the U.S. and the U.K., we saw a few weeks of elevated cancellation.
I think really tightly coinciding with the world being a pretty scary place and the Russian invasion in Ukraine. And in the U.S., that’s flowing through very directly to people feeling the pinch of the gas pump, which is really obvious barometer of inflation for folks. But we see, overall, very much in line with long-term trends there.
And consistent with, I think, the picture you see in the disclosure for FY22 where revenue per active Angle actually is the highest we’ve ever delivered. So nothing exceptional to flag there. I think in terms of where we were versus expectations for the first couple of months of the year, nothing beyond kind of normal variance around the plan.
We had — so there’s nothing exceptional to kind of call out there. And as I say, it’s a case of Deloitte really just prudently doing their work as auditors and saying, we should apply some severe downside tests, and that’s an appropriate thing to do at a time where, obviously, there is a degree of economic uncertainty.
But I think ultimately, Naked is well positioned to look for opportunity in that type of environment. So obviously, no one enjoys going through the technical process of audit review. But in the real-world context, I feel very confident about where Naked and the fact that we’re well positioned to deliver on a year of looking for responsible growth.
Unidentified Analyst
Okay. Thank you. That was very helpful. And then on the second one would be, you talked about consumer behavior changes during tough times. And maybe just your thoughts on whether you think consumer behavior regarding subscriptions would change in these tough times and where people go for more individual bottles, even if they are priced higher than what your bottles are but — because they are not going to signing up a subscription or a bulk payment every three months or every few four months. Is that a possibility? Do you think that kind of behavior exists — could potentially exist in the next couple of years? Thank you.
Nicholas Devlin
Look, I want to start off by being honest about what we do and don’t know. And when you look at the current prevailing inflation rate in the U.K. and the U.S. in particular, consumer confidence in the U.S., they’re generational high to generational low. So I obviously have no direct experience of exactly that. But what we do know really well is in the time we traded a subscription-based business, Naked and a bricks-and-mortar traditional retailing business, Majestic, side-by-side in the U.K. market, the Naked business was much more stable and predictable at times for consumer confidence was challenge.
Think about things like the time of disruption around the Brexit vote in 2016. And to me, that showed a couple of things. One, the model we’ve got with the continuity relationship and allowing customers to build out money to spend progressively actually makes it easier for customers to continue making purchases when there’s uncertainty; and the second thing was, it’s a model that people are emotionally engaged in it, not just a dollar-for-dollar value for value equation. Yes, we made great wine and the value of money is amazing, but people also become loyal to their favorite winemaker and that product’s exclusively available at Naked.
I mean you see that in our high sales retention rate. You see it in a business that generates a net promoter score of 60%, getting up to about 80% amongst longer tenure customers. So those are things that position us, I think, very well. It means that we’ve got a good chance of being able to focus on some of the upside, which is, yes, when times are tougher, every bit of long-term research ever done shows that is when there is more consumer switch, and that’s exactly what we want to drive.
We’re a 1% market share business. We’ve got a large TAM. And I think we’ve got a differentiated proposition. So I think we need to run the business prudently, mindful of various risk. And there is a degree of uncertainty. But equally, we founded this company in 2008, and I’m very confident that we can find some good opportunity in the year ahead.
Unidentified Analyst
Thank you very much.
Operator
[Operator Instructions] We can take our next question now from Andrew Wade of Jeffries. Please go ahead.
Andrew Wade
Hi, guys. And couple of questions for me. The first one, you sort of talked to a £1.75 billion to £2.25 billion 5-year payback as being sort of Goldilocks range. Is that — is your expectation that you will fall in that range in the year ahead? That’s the target. That’s the plan? Is that what you’re measuring — what we should be sort of measuring the outcome versus?
Nicholas Devlin
Yes. That’s — and I think we’ve talked about that range in the past. We’ve also talked about it with a spread around 4 times when we had a life time 20-year payback metric. So — and the reason we get there, right, is that we sit down on an annual basis and we look at the realized returns on a cohort, we do all the discounted cash flow analysis, you weigh in the overhead working and how we expect that to scale.
And you make sure that the money you’re investing is delivering an attractive IRR. So those investments make sense. And that’s how we generate that range. which is I think more to say a £1.75 billion to £2.25 billion might not be the right range to get to that analysis forever in eternity, but I think it’s definitely the right range for us about in the year ahead.
And you’ll see in our biggest market, where we invest the most in the U.S., we comment in the materials that we would pay back — move back into that range in the final quarter of FY22. And it’s certainly our intent to look to deliver payback across the group in that range in FY23.
Andrew Wade
Excellent. Thank you. Very clear. Next one, you sort of talked to the not too just past that sort of 20% revenue aspiration. Is that still — it’s not mentioned in the statement now. Is that still the sort of aspiration? Is there another aspiration which you have now? And how are you thinking about that sort of medium-term growth target?
Nicholas Devlin
Well, I think a couple of things that’s important to have on the record, right? We’ve always believed in operating the business on a rational basis and kind of guiding the decisions we take based on the data we see and making sure where we’re delivering growth, we’re delivering growth that’s creating a lot of value as opposed to chasing a gross number for the sake of it.
I think the second one is, the context is a little different from a year ago. And anyone looking around the world at any of the kind of macroeconomic indicators consumer confidence or outlook and it’s important that we recognize that as well.
And we have a degree of flexibility on what we expect in the business and take a long-term perspective on how we best make sure that Naked here in 10 years’ time is materially larger than it is today and continues to create great value for our consumers and our winemakers.
The second bit, I think, goes a little to mechanics. We invested a little less than we hoped last year. And our guidance this year doesn’t have a stepping up that investment materially. And evidently, that does have a knock-on effect on the rate of growth that we would generate in the short term.
So I think the short version of saying the right implication of today is that the near-term growth trajectory at a headline level will be a little lower. I don’t think it changes our philosophical view that we have a large TAM. We have a clearly differentiated model, and we’ve got a decade of proving that we can generate attractive unit economics behind that. And you put all those things together, I think this business should and can and will be much larger if you take a kind of five-year view. But the reality is it unlikely ever to get there in a straight line.
And what we’re really focused on in the year ahead is I think we’re pretty clear in the presentation today, is making sure we’re taking a responsible balance. We will continue to look for growth opportunities as long as the unit economics are right. But if there’s a period of time when consumer sentiment is tougher and we need to run the business and it’s flat for a year and then we get back to that growth trajectory, then we’re very willing to do that. And I think that’s the right and responsible approach to take with a long-term perspective.
Andrew Wade
Yes, agreed. So I mean, I guess if you’re going to be looking to accelerate growth into a sort of double-digit territory, wherever it’s going to be, there is going to be — need to be, one, a return to stronger payback metrics; and two, return to stronger payback metrics at a substantially larger level of new customer investment as well. So I guess the question is, what gives you confidence that a higher level of new customer investment, you can still achieve those paybacks? Because it is unproven still, isn’t it?
I mean the last — the biggest absolute pound note spend you’ve made and made the — COVID times notwithstanding, is sort of £20 million, £25 million. Admittedly, that was quite a few years ago, and the proposition has moved on since then. I guess what gives you the confidence that you can spend £50 million or whatever the number is going to be to accelerate back to double-digit growth and still get the paybacks that you need?
Nicholas Devlin
It’s a shame we’re not face to face, but I’m chuckling a little bit. I guess that’s one of the great perfect counter back to the question side. I mean, for all points in growing businesses, whether or not you can scale beyond the point you’ve got to it, to some extent, unproven. And that’s I think been the number one question that people have asked to Naked, when I first got involved in the business, we’re investing about £7 million a year. And people used to ask growing surely, you found all the people who you’re interested in this weird Angel proposition thing you’ve got.
So your numbers look good now, but surely you’re never going to be able to do any more. So look, I don’t need to be clear. Evidently, the combined challenge of improving returns and doing it at greater scale is a real one. I mean the way we break it down, is say you want to have multiple tactics that can deliver that outcome and not be reliant on the success of any single one. I think what you hear us talking to in the results today with a concerted set of measures that we’re really confident give us an ability to improve our underlying unit economics.
You hear us talking to initiatives to reduce our cost of acquisition through an increase both on remarketing and reactivation of former members and through improving and making more collective our conversion rate experience. We are talking about ways to improve our lifetime value of those members and in particular, highlighting the changes we’re making organizationally to better align around the early part of the customer experience, which I think if we’re honest, there’s probably been an element that has let us down slightly.
And it’s strengthening our repeat contribution economics. Lifetime value is lifetime revenue times contribution margin. So that’s obviously important as well. I think those four things taken together, we have a lot of confidence that in aggregate, that can drive our lifetime value. And that’s the best way to grow any business like ours responsibly. You take initiatives that mean you generate more lifetime value for each, basically, visit you — to your website. And if you do that, that gives you the best chance of consistently deploying more growth capital, acquiring customers at attractive economics.
So that’s what we’re working on. Beyond that, we also do talk to the brand marketing hypothesis. And I think that’s really important because you don’t see a lot of examples of businesses that have got to where we are today, £350 million category leader that then go and take the next step of scaling without diversifying away from a pure performance marketing mix.
So I think that’s another thing that’s important to bear in mind, right, the journey from say investing £7 million to £40 million a year on the early from £40 million to £60 million, £80 million, £100 million a year at some point in the future. The constituent parts of that may indeed are likely to look different. So it’s not a case of having to do more of exactly the same things we’ve done in the past.
Andrew Wade
Okay. That’s some helpful color. Thanks. And then finally, a real brief one. I wasn’t sure I got the exact gist of where — the working capital bit, are we expecting a working capital inflow or outflow this year, assuming everything goes to plan?
Nicholas Devlin
The very simple boiling that down and saying we would expect moderate outflow, primarily as inventory levels rise a little, but materially less than they did last year.
Andrew Wade
Yes, excellent. That’s what I thought. Great. Thank you.
Operator
We can now take our next question from Ben Hunter on Investec. Please go ahead.
Benedict Hunt
Hello. I just had a question on the guidance because obviously, you talk of consistently having your sales retention — repeat sales retention across H1 and H2, which points to obviously a healthy proposition. But then when I look at the guidance and you’re sort of pointing to £83 million to £93 million of repeat contribution. And I think, okay, well, if you do £40 million of investment in new customers and supposing you don’t get a terribly good return on that, it speaks of the, if you like, the retention falling quite dramatically or your expectation that it will do this year.
And I wanted to know whether that was more a function of because you believe the sales retention is going to be worse off this year or more because the — there are inflationary process in marketing and logistics?
Shawn Tabak
Yes, I can cover that one. So look, I think one of the really wonderful things about this business is the high retention rate of our customers. And you can directly link that to the proposition, the strong consumer proposition that is continually reinforced by the winemaker proposition. Very simply, the wine is good and the customers are really enjoying what we’re providing. And that would lead to that really high sales retention. And in fiscal ’22, the sales retention was 80%. That was a great result for us, especially because it was 88% in the prior year.
And during COVID, in particular, people were at home and ordering more frequently, which set up a tough comp for fiscal year ’22. So 80% is — was a good result and above our expectations for that year. I think what that highlights is the robust nature of the repeat customer book — base and the loyalty that we have from our customers. I think as we highlighted in the guidance and as Nick said, today, our guidance also is cognizant of the fact that there’s geopolitical environment, wars. There’s inflation, gas prices and things of that nature. And that’s what you see reflected in our guidance that we gave today.
Benedict Hunt
Okay. So I mean, sorry to be — are you sort of assuming in your internal forecast that sales retention comes back, I don’t know, 70% this year? Or is that a bit too harsh?
Nicholas Devlin
I think what Shawn is getting at, right, is there’s a pretty wide range on that, which reflects there’s a degree of uncertainty. We don’t assume the sales retention comes down at loss, but equally, we haven’t traded the business with inflation at 11% and consumer confidence in the U.S. where it is. So it’s important that we have put a range around that guidance.
Benedict Hunt
Okay, fine. Second question, which is more sort of a broad question. But I mean, there seems to be a lot of costs going into the business in general, admin and marketing R&D. And it feels like, obviously, you’re, to some extent, needing to improve the contribution margins by way of either increasing pricing, changing the range around and getting sourcing benefits with your winemakers and perhaps even doing some brand marketing and to some extent, let’s see if there’s a bit charges to say, maybe downgrading the — or devaluing the proposition.
And clearly, previous management were always pretty religious about the way the value proposition that makes it. So, are you finding — I mean, so my question is — a long way of asking it is how far are you prepared to perhaps downgrade the proposition in order to maintain a sensible margin of this business? Are you finding that there’s more and more costs that you’re having to invest into and therefore, that you’ve got to somehow start going up the price scale or using more brand marketing or finding more sourcing really? Sorry, it’s a bit of a long-winded way of…
Nicholas Devlin
Maybe I’ll give you a short answer — not an inch. Look, making sure we deliver for our customers, our winemakers is the reason we exist to the business. I think it’s really, really important to disaggregate two things. Belief in sharing the benefits or economics as we scale and making sure we consistently deliver value for all our stakeholders is not the same thing as a belief that your prices are going to be the same in 1990, 2000 and 2020 and 2030. Where the real cost of doing business be the direct cost of production or cost of getting product to consumers move.
Number one, we look to use our scale to mitigate those as effectively as we can; but number two, we do need to pass those through. If you look at — and this is something we spend a lot of time looking at the relative value we’re offering to consumers, that’s not being degraded. It’s not like the alternatives for consumers are a set of products, which are becoming cheaper and cheaper. So I think it’s really important. We — I’m not someone who kind of would be willing to sacrifice that part of the consumer experience. So I guess on that note, you can say I share the same religious persuasion as former management.
Operator
We can now take our next question from Charlotte Barrie of Berenberg. Please go ahead.
Charlotte Barrie
Hi, Nick. Hi, Shawn. My question was actually on paybacks and kind of having confidence in them going forward, which you’ve already answered in a couple of the questions so far. But another sort of question. I’m just wondering, with this strategy to move towards a slightly more premium positioning and also you experience this year of acquiring what seemed to be sort of less desirable customers. Do you think there should be any reassessment of the size of the talent that you’re looking at going forward?
Nicholas Devlin
I think. So. I mean if you look at the way we’ve comprised that £25 billion TAM, the U.K. is a relatively moderate component of that overall addressable market. And I don’t think anything we’ve learned in the U.K. really changes that. I think probably what has happened is because — referencing our last question, maybe we held our price point too long. We may have attracted some consumers that we never really counted in our TAM in the first place. And we may have seen some results acquiring those consumers that suggest we were right never to have had them into TAM in the first place either.
Charlotte Barrie
Okay, thank you.
Operator
We have no further questions over the phone at this time. I’ll hand over to Nick and Shawn for web questions.
Nicholas Devlin
Okay. We’re not on our most slicker here. Are we going to read them for each other, Shawn?
Shawn Tabak
Yes. That sounds great. I will start. It looks like the first one on the list here is maybe for you, Nick. So are you still seeing improvement in current year 2022 retention of mature Angel customers? And is the revenue per mature Angel still on an upward trajectory?
Nicholas Devlin
Yes. So I think Jason submitted this one. The disclosure we’ve got in the pack, I think it’s Page 26, shows the trend in terms of revenue per active Angel. We received a bit of feedback, and we’ve shown this on a per mature Angel in our last disclosure. And people said, hey, your customer metric disclosures and active Angel disclosure and mature Angel was an older metric we’d use. So we’d just like to tidy this up. So you’ve got that data available in presentation. The two things are incredibly highly correlated. So that’s your answer for that one.
Okay. We’ve got a two parter from Andreas, which going to challenge who’s going to read what. I’ll start with one for you. Can you elaborate on the property sale of £5 million? Is it a sale and leaseback? If so, where is it in the P&L?
Shawn Tabak
Yes. After the end of the year, I think what Andreas is referring to, we sold a property that we have in London. That property was a holdover from when we were part of the Majestic Group. So it was a noncore asset that was just — held on our balance sheet. And we received a good offer for it, and so we agreed to sell it and the transaction closed after the end of the fiscal year. It’s not a sale leaseback. As I said, it’s a noncore asset and not something we were actually utilizing. And yes, so it will flow through the P&L in FY23 as a gain on sale of an asset.
Nicholas Devlin
Perfect. Do you want to give me part 1?
Shawn Tabak
Yes. So with the high retention you have seen in Australia despite price increases, what is holding you back with price increases in other countries to restore margins?
Nicholas Devlin
Andreas, I think there’s always a balancing act here. And we wanted to do a couple of things. Firstly, it’s never our first instinct to take price, and we look to take other measures to offset that, find efficiency within our business. Secondly, I think it was important and useful for us as a group to take advantage of the opportunity we have to deploy things in a sequential way and actually using our Australian market to validate an approach to reviewing the range, identifying where there was opportunity to take price whilst maintaining that overall value to money equation for Angels and validate that we could do that without harm to the overall economics of the business.
So it’s very much our intent now to take that as a playbook and roll that through. That action is underway in both the U.K. and the U.S. So I don’t think there is a lot of an extra things to wait for. So really looking to just take a balanced approach and make sure that we weren’t rushing into something that we then came to regret.
Shawn Tabak
Okay. We have a next question here, Nick, is looks like it’s for you. Congratulations on the development of the business so far. I think the high retention shows how beneficial the economics of the business model are for all stakeholders. Some questions. How do you think about shared scale? First question. Second question, do consider lowering the monthly Angel contribution with growing scale? Third question. Or do you think the high monthly contribution is important for strategic reasons?
Nicholas Devlin
Yes. So a few different things in there. And I talked to this concept in the presentation of how we balance our philosophical belief that sharing the benefits of scale with all our stakeholders is the best way to create long-term value. We’re responding to high levels of inflationary pressure in parts of our supply chain. Ultimately, I think we have opportunity to strike a balance there and that we have an opportunity to make sure our economics are strong and sustainable.
And ultimately, the right repeat contribution margin for the group is probably the lowest one that allows us to invest in acquiring customers at scale and deliver attractive returns. That’s how I think about it ultimately.
On the detail here around the Angel contribution amount, this is exactly the kind of thing in our business that we consider perfect for an iterative test and learn approach. I don’t think there’s a single philosophical answer as to the right Angel contribution. It’s the kind of thing that we do in reality and in practice, kind of test relatively frequently and optimize the results to that.
Shawn Tabak
Great. Looks like the next one might be for me. I might just read it to myself. So at what point…
Nicholas Devlin
I can read for you if you’d like, question from Brad which says your financial filing raised some uncertainty about making as a going to that. Specifically, it noted the potential for capital raises in the fourth quarter and a potential for a covenant breach where there be a decline in repeat contribution. Can you talk about the sustainability of making balance sheet?
Shawn Tabak
Yes. Happy to. So look, I think as we mentioned earlier, we ended the year with a strong balance sheet, £20 million of cash. And I think really importantly, £140 million of really fantastic wine that we earn a great contribution margin on. We added the credit facility after the end of the fiscal year. We thought it was strategically good to have increased liquidity. And so we added the credit facility, allows us to borrow against our U.S. based inventory. And I think as we talked about the base case forecast shows that we have sufficient liquidity for FY23.
And on top of that, we talked about expecting to manage the business to a breakeven adjusted EBITDA, which is something that we — is also explicit in the guidance that we provided today. So I think as we talked about — the technical point here, I think, that’s being made is there’s a number of confluence of ifs — if/then statements that would get to that. So if the performance is worse than expected, if we didn’t trade the business differently as a result of that, if we didn’t do anything additional to conserve in that case, we’re reliant on the loan and like most credit facilities, there are financial covenants in the credit facility.
Nicholas Devlin
Yes, I think that’s important. And look, I think a really important issue for us to spend a bit of time reflecting on because I know it will attract ton of questions. I’m sure lots of people on the call have got questions. Look, things we’re being clear about here are, number one, we don’t have a plan that is reliant on us using external borrowing, but we thought it was prudent to put a little bit more flexibility into the balance sheet; number two, we don’t think we’re going to have any problems with the covenant on that loan, but under a downside scenario, we could have problems. That’s a technical point that’s being raised.
Directly to your point, Brad, we’re not stating or guiding here that there’s a likelihood or an intent of us as a management team to raise capital in the fourth quarter. Nearly what our auditors are saying is were there to be a severe deterioration in the business and were we not to take measures to address that and we’ll not have recourse to this loan, then we would have a requirement for capital. So I think another way of thinking about it really simply is not only did the business generate profit last year, but you see it generate materially higher levels of standstill profitability.
And what that shows is we have a lot of choices in this business, we can get to a number of different P&L outlook for the end of the year. We could deliver materially higher short-term profitability were we so minded or if we needed to. So there’s a lot of optionality in the business. There’s a lot of discretionary expenses, whether that’s discretionary marketing expense or SG&A expense that we could unwind out of the business were it to be necessary. So I think that’s really important. Ultimately, what we’ve got here is a technical challenge, which says, hey, if you layer a few hypotheticals on top of each other and interactions, then you have some requirements.
To be very clear, were we to see materially deteriorating demo behavior and what that impact our generation of contribution in that — the way it’s highlighted in a severe downside scenario, we would trade the business differently such that we wouldn’t have this requirement. So I think it’s important to spend a bit of time on that, and thank you very much for the question, Brad.
The flip side of this, a couple of people have asked kind of questions, obviously with a different share price around potential for share buybacks. So the question here is, at what point, if any, would a buyback program be considered for as a good use of available free cash flow, Shawn?
Shawn Tabak
Yes. And maybe I can talk about the philosophy and how we approach capital allocation. I know this is something we’ve had disclosures on, but I think it’s important to address. So I think the first point to make is that our philosophy is predicated on maintaining sufficient cash to operate the business and also given the seasonality of our purchasing cycle and a little bit of sales seasonality with the holiday quarter. Our approach is to allocate to growth investments that deliver returns in excess of our internal hurdle rate.
And any potential excess capital that we have above the amount that’s needed to run the business and invest in growth is — our philosophy is to return that to shareholders. Given the levels that we’re at today, we don’t anticipate any returns of excess capital to shareholders in fiscal year ’23 at this time.
It looks like the next one, Nick might be for you. So let me read that one. iOS updates have affected mobile marketing and a lot of concerns have been raised around the payback economics of your Angels.
That drop in Angel’s payback is permanent and historical payback will never be reached again. My first question is, apart from TV ads and banners, which takes a longer approach, can you give out other examples of new marketing initiatives or strategies that demonstrate the company’s ability to revive its Angel payback back? Secondly, what is your long-term target for repeat customer retention? And please give examples of initiatives that is improving that metric.
Nicholas Devlin
Yes. Owen, I think to reinforce some of the things I said in live Q&A from analysts. We don’t believe that there’s a permanent degradation of our payback, and we believe there are a number of levers we can pull to address that. I think beyond that, we see evidence from that from payback increased in the second half of the year and returning to our goldilocks range in our key U.S. market in the final quarter. In terms of the strategic focus this year, very much about strengthening our cohort economics, our unit economics at a cohort level in order to allow us to deploy more capital with confidence and not be reliant on movements in kind of marketing cost, which we can’t control.
So directly, I think to reinforce what I’ve already said, there’s a couple of things that focus on reducing our cost to acquire a member. One of those is increasing the extent to which we target the remarketing to leads we’ve already generated and reactivation of former members. You see that getting really good traction in the business, in particular towards the end of our second half. I think in the pack, we showed that 17% of members acquired in the fiscal came from reactivation of former members and that we believe we can materially increase that in the year ahead. We’ve also increased resource dedicated to improving the conversion rate experience.
And one of the major technology products we’ll be landing in this year, for example, will be a new payments processing platform, which will support that and able to enhance our checkout and payment experience.
Secondly, we think once we’ve got customers to try the wine, we can do a better job of getting them into the habit of being loyal customers. And as you’ve always seen at Naked, we have a very high retention rate once customers get into that bursting rhythm, but there is an opportunity to better convert trials second purchase.
And being honest, I think we’ve missed the trick in never having brought together a cross-functional team with exclusive focus on that. So that’s something we’re doing this year.
Finally, I think there’s a lot of stuff we can do to drive lifetime value, which was half of the payback equation through strengthening the contribution economics of the business. You see over the medium term that repeat contribution margin has moved from the low through the mid- to the kind of high 20% sort of group level, but took an unusual step back this year as we faced some exceptional cost pressure.
What we talked at a bit of length in this presentation is steps we’re taking to turn that trajectory back on to its long-term trend. And again, that’s a really great way for us to expand lifetime value — better convert lifetime revenue into contribution. And all of those things give us a lot of confidence that we can pull those levers. We don’t need all force to be totally successful for us to materially enhance the return we generate.
On the second point, in terms of long-term sales retention and Angel retention rates. We don’t have an explicit long-term target. But I think it’s helpful to point out that the level we’re at the moment, I think, for a non-software as-a-Service business, getting sales retention rates considerably in the 80s is very differentiating. And maintaining that very much enables us to meet our guidance we’ve given of building the business as it matures to deliver a 10% plus EBIT margin. So we will always work hard to make that number higher. But equally, it’s a number that supports our long-term aspirations where it is today.
Naturally, and I think you see it from our cohort chart disclosure, to the extent that the average age of cohort increases in the business, bit of a mathematical sense that, that number will drift up over time.
Shawn Tabak
Great. Next one here, Nick. Why are more U.S. consumers embracing your value proposition, which, given the owners to our system appears very compelling?
Nicholas Devlin
Look, I agree. It’s very compelling. Look, that’s the challenge for us, right, is to make sure that customers understand the point of differentiation that they Naked offers. Worth saying that even 10 years of operating in the U.S. market, we’ve built a business with 1% market share. We have the 17th largest winery in the USA, and we built the largest pure DTC business in America and in the world. So I think we’ve achieved a lot. But absolutely, we want that business to be much better known and understood.
And that’s a key part of the reason why even in a challenging time, I think it’s exactly right and appropriate for us to be investing money through our marketing R&D line in building out our brand marketing capability and ultimately trying to drive more awareness, but in particular, comprehensive of what we do. And I think as people understand that there’s an alternative to the three tier system. And we help educate customers as to what the ultimate downside there as a consumer of the way wine is typically made and sold in the U.S.A.
But I think there is an opportunity to materially enhance growth and bring a new wave of customers into the business. So I guess the short answer is we’re working hard at that. That’s the job at hand and that’s the path that we believe over time will let us materially scale the business in the U.S.
Shawn Tabak
Okay. Next one here, Nick. You guided to no growth and no profit for financial year. So customer attrition is too high and renewal acquisition costly. How are you going to change that in the future and get back to a 20% annual growth rate?
Nicholas Devlin
I think the answer is we’ve got a lot of commonality to some of the things we talked to you before. The best group to accelerating growth is improving our unit economics. I think I’ve talked pretty clearly to the kind of four major initiatives we’re focused on this year to do that. Maybe a couple of other things to draw out. I think it’s interesting to look at our Australian division because we talked on the call today about some repositioning of the business. And I think that’s very similar activity we undertook over the last two years in Australia.
And you see the dividends of that with our Australian business in much better shape and returning to stronger growth with enhanced economic strengthen margins. So we can understand the work that we have here to do. We’ve got a playbook for a lot of the stuff that I think we can move through. So confident that we are going to be able to make good progress. There are obviously things that are outside of our control in terms of what exactly the consumer environment looks like over the course of the next 12 months.
But I think there’s plenty here that we can control, and that’s what we’ll be focused on. And a question, for you Shawn, from Alex, which says in terms of guidance around operating the business at an adjusted EBITDA level to break even, why exclude share-based compensation? It’s a real cost.
Shawn Tabak
Yes, sure. So I think I think the adjusted EBITDA, what it shows you is the — it gets a little bit closer to the cash basis. And I think — and that’s our intention was to trade the business even on a cash basis in fiscal ’23. I think as we talked about today, we have a very loyal customer base with a value proposition that’s resonating with our customers. And that results in repeat contribution profit and ultimately, cash flow that we reinvest back into our SG&A as well as into our future growth.
And so we’re cognizant as we talked about of the environment in the market. And so we just talked about trading the business even on a cash basis and adjusted EBITDA is the closest metric to that.
Nicholas Devlin
All right. I think we’ve got time for one final…
Shawn Tabak
Yes. Is a 1.5x 5-year payback lower than your internal hurdle? How much of the drop in payback is caused by the privacy setting changes in various operating systems? And what’s the longer-term payback customers you expect?
Nicholas Devlin
To restate what I talked about in the live Q&A. The way we operate the business in terms of deployment of growth marketing is to look to maximize investment within what we describe as our Goldilocks range of a return of 1.75 to 2.25. The way we set that range in through doing a thorough annual process where we look at the real return on a cohort level using a bunch of discounted cash flow analysis and including allocation of all overhead associated in the business. And that’s how we set that range. So as you can see from that, I’m not going to get into specifying our internal hurdle rates, but we’ll be transformed. 1.5x is below what we would seek to deliver.
I think, again, in a year where you had more normal progression of your contribution margin, we’ve probably been pretty close to the bottom end of that range, but I’m not going to make any excuses. We would have liked to have done better.
In terms of how much of that is directly attributable to one single thing, I think we talked quite extensively at the half year, but there were some challenges posed to us in terms of the impact of privacy changes. I think you see in our disclosure today that our return on the first half cohorts was weaker than our return on second half cohorts.
We’ve adapted the way we market in the business to that environment. But I don’t think — again, I don’t want to make that a single excuse. Facebook has never been, for example, our biggest marketing channel. And there are plenty of other ways we can acquire customers. So very much for us, the focus is on making sure that we are doing the things we can do to control the amount of lifetime value we’re generating from the traffic that comes to us and using that to enhance our cohort and deliver better returns, which enable us to deliver sustainable growth.
I think on the flip side though, ultimately, a bit like reviewing a coach at the end of the season, we’ve got 11 years to cohort for you to take a look at. I think we’ve got a pretty good track record of both responding to the data and making our investment levels be responsive to the returns we’re returns and of being able to invest and find good places to deploy capital at attractive returns. I’m really confident we’ll be able to get back into that range in the year ahead.
Nicholas Devlin
Okay. I think on that note that it’s going to put an end to our Q&A. Thank you very much to everyone who submitted questions and everyone who joined and listened to the recording. And if you’re picking this up and listening later. And we’re going to have a chance to talk to go to a number of you over the course of the next week or so. Thanks very much.
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