Vintage Wine Estates (VWE) Stock: Risk Not Worth The Reward

Vintage Wine Estates (NASDAQ:VWE) has taken a beating recently, based on the news it was replacing its CEO, restating earnings for the last quarter, and withdrawing guidance for full year 2023.

To top it all off, it also released preliminary numbers for the second fiscal quarter of 2023, where the company downwardly revised revenue and gross margin.

At the end of trading on February 9, 2023, the share price dropped over 27 percent to close at $2.02 per share.

In this article we’ll look at the headwinds facing VWE and what it is doing in an attempt to right the ship.

Price share movement

Even though VWE stock price took a big hit in response to the devastating headwinds, it in fact had already been under heavy pressure since June 24, 2022, when it began a prolonged downward move from a little under $10.00 per share, to a 52-week low at the time of approximately $2.10 per share, before falling to the current 52-week low of $2.00 per share, which it reached on February 9, 2023.

Since mid-September 2022, it has been trading flat and has continued to up to the time of the news releases on the struggles it’s now facing.

The point is, the weakness of the company was already reflected in its share price, and it has the potential to fall much further, I believe, not only because any other negative news would send it reeling, but also because there is little light on how the company is really doing with the removal of guidance and downward revisions, and the potential disruption that could come from a new CEO that has been handed a major mess to clean up if he can.

The headwinds it faces

VWE reported four significant challenges it faces, including installing an interim CEO, weaker-than-anticipated preliminary second quarter results for 2023, the total withdrawal of fiscal 2023 guidance, and a restatement of financials for the prior quarter.

Director Jon Moramarco was appointed as the interim CEO, while former CEO Pat Roney was placed in the position of executive chairman.

While installing a new CEO can at times cause some uncertainty, in the case of doing it in the midst of the issues listed above, and on an interim basis, suggests to me there are things going on behind the scenes at the company that led to the rapid transition of leadership.

For example, along with the immediate change in CEOs, it was also announced that the company was going to retain a “corporate strategy and acquisition integration advisor” to help the company restructure the business. Going from some accounting errors to restructuring the business points to something going on at the foundational and fundamental level that the board apparently believed it had to take immediate action on.

As for accounting issues, according to management, the company will have to restate its financial statement for the quarter ended September 30, 2022 because of “the misclassification and accounting for certain assets and also the timing of recording certain costs.”

The changes will include an increase of $700,000 in net revenue, along with an increase of $2.9 million in the cost of goods sold. In the previous report, earnings per share was reported at $0.02, while in the restatement EPS will be listed at $0.00.

With the restatement of its financial statement for the first fiscal quarter of 2023, it triggered the total withdrawal of full fiscal 2023 guidance because of the change in numbers part of the guidance was predicated upon, along with the downward revision of its guidance for the second fiscal quarter of 2023.

Last, the company released information concerning its preliminary Q2 results, which were downwardly revised with revenue and gross margin.

In regard to revenue, it’s now expected to be at $81.00 million for the reporting period, down from consensus of $86.47 million. Gross margin was cut from 43.5 percent to 35 percent.

The downward revision of its gross margin is particularly troubling to me because of how wide it missed. It’s not unusual for companies to miss by a modest amount with guidance, but to miss by that much, in my opinion, underscores the problems the company faces operationally and in getting a handle on the business.

Steps being taken to right the ship

In response to the headwinds the company faces, it laid out some immediate steps it’s going to take to have an impact on VWE’s performance in the near term. Most of those include raising prices in certain parts of operations while cutting costs in others.

Concerning raising prices, in its Direct-to-Customer (DTC) segment it’s going to increase prices and shipping charges; increase prices with some of its brands that generate high volume in wholesale; boost freight recovery charges in its Business-to-Business (B2B) segment; and renegotiating some contracts to widen margins while exiting contracts that aren’t as profitable.

On the cost-cutting side of things, it’s going to lower marketing spend in its DTC segment, specifically in relationship to materials it uses to market and advertise.

It’s also working on costs associated with bottle mold in its supply chain, along with other unidentified areas.

After implementing the changes, the company expects to improve costs by approximately $10.00 million, although it’ll cost about $2.00 million to put the changes into action.

Conclusion

There’s no way of getting around it. VWE is a mess at this time, and it will take time to work its way out of it. Interim CEO Jon Moramarco said while expecting to return to EBITDA growth in fiscal 2024, the end result will be “a potentially smaller, but meaningfully more profitable enterprise.”

At this time I wouldn’t touch this company because there is simply no clarity or visibility as to how it’s actually going to perform in short or long term. I would wait until its next earnings report and management commentary before taking a serious look at VWE.

It’s going to have to prove it can execute on its plan to cut costs and prove it has a clear path to profitability. That’s going to take time, and even though the stock is trading at very low levels, I would hesitate to take a position based upon that because it could definitely go south again.

For now, this is a stock that could be traded in the short term based upon its price movement, but it would be important to wait until there’s enough volume coming in to move the share price in a way that is conducive to having the potential for wide, but temporary swings in its share price to justify taking the risk.

As an investment, I would wait until the smoke clears before thinking in terms of taking a position. I know the low price is tempting, but there’s a high probability it could drop much further before finding a bottom. The risk isn’t worth the limited reward at this time.