Winc, Inc. (NYSE:WBEV) Q2 2022 Earnings Conference Call August 11, 2022 11:00 AM ET
Company Participants
Matt Thelen – CSO & General Counsel
Geoffrey McFarlane – CEO
Brian Smith – President & Chairman
Carol Brault – CFO
Conference Call Participants
Ryan Meyers – Lake Street Capital Markets
Alex Fuhrman – Craig-Hallum Capital Group
Bobby Burleson – Canaccord
Operator
Ladies and gentlemen, greetings, and welcome to the Winc, Inc. Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.
I’ll now turn the conference over to Mr. Matt Thelen, Chief Strategy Officer and General Counsel. Please go ahead, sir.
Matt Thelen
Thank you, and welcome to Winc’s second quarter 2022 earnings conference call. Joining me on today’s call are Geoffrey McFarlane, our CEO; Brian Smith, our President and Chairman; and Carol Brault, our Chief Financial Officer.
In a moment, you will hear brief remarks from all three followed by a Q&A session.
By now, everyone should have access to the earnings release for the second quarter ended on June 30, 2022, that went out earlier this morning. The earnings release is also accessible on the company’s website at ir.winc.com, and on the SEC’s website at sec.gov. And shortly after the conclusion of today’s call, our webcast will be archived on the website for the next 30 days.
Today’s call will contain forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements includes statements concerning our ability to obtain adequate financing and continue as a going concern, our total addressable market, liquidity and capital resources, financial and business trends, the impacts of COVID-19 on our business and global economic conditions, and our expected future business and financial performance and can be identified by words such as believe, may, will, estimate, continue, anticipate, intend, expect, could, would, project, plan, potentially, preliminary, likely and similar expressions.
Although, we believe the expectations reflected in the forward-looking statements are reasonable. We cannot guarantee that the future results, performance or achievements reflected in the forward-looking statements will be achieved or will occur. Any forward-looking statements made herein speak only as of today’s date. And you should not rely on forward-looking statements as predictions of future events.
Except as required by applicable law, we undertake no obligation to update any of these forward-looking statements for any reason after the date of this call or to conform these statements to actual results or revised expectations. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations.
For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today’s earnings release, our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2022, filed with SEC on May 13, 2022, and as maybe updated in our other periodic filings with the SEC.
During the call, we will also discuss certain financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. For more information on our use of these non-GAAP financial measures, including a reconciliation of each to its nearest GAAP equivalent, please refer to today’s earnings release.
Further, throughout this call, we will provide a number of key performance indicators used by our management and often used by competitors in our industry. These and other key performance indicators are discussed in more detail in our earnings release.
With that, I will turn the call over to Geoff.
Geoffrey McFarlane
Thank you, Matt, and good morning.
It is my pleasure to speak with you today to discuss our second quarter results. Following my opening remarks, I will turn things over to Brian, who will give an update on our core brand portfolio. Then Carol will discuss our Q2 financial results in greater detail before we open the call for questions.
The power of Winc’s unique omni-channel platform remains a key point of differentiation, creating a long runway for growth and improving profitability as we continue to scale our business. Results in the second quarter continue to demonstrate meaningful progress toward our long-term goals despite more challenging macro conditions.
We had another strong quarter in wholesale where revenues increased 32.3% year-over-year to $6.3 million driven by volume growth as we continued to expand distribution, add additional SKUs to existing accounts and improve velocities.
Retail accounts for six months ended June 30, 2022, were up 66% year-over-year to 12,990. And we continue to work toward our long-term target of 50,000 retail accounts.
In direct-to-consumer, net revenues were down 11.8% versus the prior year period, largely reflecting planned changes to digital marketing spend. Volumes were lower, but this was partially offset by a strong 17% increase in our average order value, reflecting a lower mix of first time orders. This also had a positive impact on our segment level gross margin, which improved 710 basis points versus last year and we continue to focus on optimizing performance across our direct-to-consumer business.
On a consolidated basis, our gross margin improved 200 basis points year-over-year to 43.5%, reflecting the improvement in direct-to-consumer partially offset by a higher mix of imported wines in wholesale.
We are very pleased with this performance in the face of challenging macro conditions and aim to realize further margin improvement as we continue to scale and the international freight market continues to normalize.
Our adjusted EBITDA loss improved sequentially to $3 million, compared to $3.1 million in the prior quarter. Near the end of Q2, we took steps to reduce operating costs across the entire business, primarily by making targeted reductions in marketing and innovation spend, which we believe, will enable us to focus on the core areas of the business as we seek to achieve positive adjusted EBITDA and allow us to grow our organic portfolio in existing core brands.
In summary, assuming we successfully manage our liquidity, we believe, we will remain well-positioned for the future. Underlying demand for our high quality products remains very strong and we believe our omni-channel model provides multiple pathways to growth and profitability as we leverage the power and scale of our platform.
Now, I will turn it over to Brian Smith to discuss our product portfolio, wholesale growth and some things to look forward to in the coming quarters.
Brian Smith
Thank you, Geoff.
We’re pleased with our progress in the second quarter, including our significant growth in wholesale led by our initiatives to expand distribution. We continue to see strong growth in the wholesale channel driven by our portfolio of brands. Our core brands, which we define as having individually generated more than $1 million in net revenues through the DTC channel and more than $0.5 million through the wholesale channel in the last 12 months and which we believe has the potential to continue to grow sales through the wholesale channel, collectively grew in case volume sold by 28.8% during the second quarter of 2022 versus the same period last year.
We currently have five core brands, Summer Water, Folly of the Beast, Wonders, Chop Shop and Lost Poet, all developed internally in which help fuel our wholesale channel growth with retailers across the country.
Summer Water has continued to find success with consumers. We’re seeing strong demand with volume increasing by 35.8% across all channels in the second quarter of 2022, compared with the prior year period. New activations with key retail accounts like BevMo are furthering chain expansion. We continue to see high demand for our organic portfolio as retail shelf space evolves to meet an increasing consumer demand for organic, better for you and natural wines. For example, in July Drizly reported that our organic Biokult naked brand was one of the top five brands sold in the orange wine category, which is one of Drizly’s fastest growing subcategories of wine.
As one of the biggest trends in the industry, we believe, our diverse portfolio provides a strategic advantage in the organic better for you and natural wine category. The primary growth driver for wholesale is retail expansion of our portfolio of brands. Through Q2 of this year, we sold to 12,990 unique accounts, a 66% increase from the same time period last year. We’re excited to announce recent retail placements of our top brands with Raley’s, Schnucks, Fresh Market and GoPuff.
Now, I will turn it over to Carol Brault to discuss our Q2 financial results in greater detail.
Carol Brault
Thanks, Brian, and good morning, everyone.
Let me run through our Q2 financial. Total net revenues for the second quarter were $17.6 million essentially stable with the prior year level, as growth in wholesale was offset by lower DTC revenues.
DTC net revenues decreased 11.8% to $11.1 million reflecting lower order volume due to a decrease in digital marketing spend partially offset by increased average order value, which was up 17% from the same period in 2021.
Wholesale net revenues increased 32.3% to $6.3 million, reflecting volume growth as we continue to expand our retail accounts, increase the number of products sold through each retailer partner, and the rate at which the products are sold.
Gross profit was $7.7 million a 4.8% increase compared to the prior year period. On a consolidated basis, gross margin increased 200 basis points to 43.5%. Gross margin in our DTC segment was 47%, a 710 basis point increase versus the second quarter of 2021 and up 460 basis points sequentially compared to the first quarter of 2022. The year-over-year increase in DTC gross margin was primarily attributable to a lower mix of first time orders, which offer significant discounts.
In wholesale, gross margin was 38.2% down 670 basis points versus the prior year, but up 310 basis points sequentially compared to the first quarter of 2022. The year-over-year decline in wholesale gross margins was due to a higher mix of imported wine, partially offset by lower product costs due to strategic sourcing.
Total operating expenses increased $1.4 million versus a year earlier period or 13.6% to $11.8 million. On a sequential basis, operating expenses were down $0.1 million compared to the first quarter of 2022.
Marketing expenses decreased $0.8 million year-over-year or 19.6%, reflecting decreased digital advertising expenses partially offset by expenses for events and branding initiative related to the launch of summerwater.com in June of 2022 and targeted marketing for the Summer Water brand.
Personnel expenses rose $0.8 million year-over-year or 27.2% to $3.8 million due to higher stock-based comp and increased headcount.
G&A expense increased $1.4 million or 41.9% versus the prior year period, primarily reflecting professional fees and insurance expenses associated with being a public company, partially offset by a decrease in bad debt expenses.
Net loss for the second quarter of 2022 was $4 million or $0.32 per share compared to a net loss of $3.9 million or $2.06 per share in the second quarter of 2021.
Adjusted EBITDA loss for the quarter was $3 million versus a loss of $2.5 million in the second quarter of 2021. On a sequential basis, adjusted EBITDA loss improved by $0.1 million compared to the first quarter of 2022.
At the end of June 2022, we had cash of $4.9 million and $6.5 million outstanding on our line of credit. Since June 30, we have repaid $1.1 million of the outstanding borrowings under our line of credit resulting in an outstanding balance of $5.4 million as of today. While we continue to seek additional sources of capital, if we are unable to obtain an alternative financing, there are no assurances we will be able to repay our outstanding borrowing debt maturity, satisfying our other obligations, and continue as a going concern.
I’ll now turn the call back to Geoff for closing comments.
Geoffrey McFarlane
We remain focused on building our portfolio of brands, leveraging our investments in the direct-to-consumer and wholesale channels and optimizing operational performance as we focus on driving our business towards positive adjusted EBITDA. We believe our technology platform paired with our deep relationships with wholesale and retail partners uniquely differentiate us within the industry and support our long-term growth expectations. We expect this focus on driving towards positive adjusted EBITDA will likely have some impact on our top-line in the short-term, but we believe this is the best for the company and long-term shareholder value, which remains our ultimate focus.
With that, we are ready to open the call to your questions.
Question-and-Answer Session
Operator
Thank you, sir. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions].
Our first question comes from the line of Ryan Meyers from Lake Street Capital Markets. Please go ahead.
Ryan Meyers
Hey guys, thanks for taking my questions. First one for me, just kind of curious what kind of feedback you’re getting from the wholesale partners right now, as far as the product category is doing and premium wine still remain an attractive category despite any inflationary pressures that we’re seeing right now?
Geoffrey McFarlane
Yes, thanks. The feedback’s been pretty good overall, and we’ve seen in our categories organic as Brian mentioned on the call, as well as rosé and our brands, really strong performance overall and strong depletions. So overall, we’re seeing good feedback in our product categories that are really resonating with the younger consumer and we see — we continue to see strong depletions in the wholesale channel.
Ryan Meyers
Great. No, that’s good to hear. And then other one for me is, you guys another quarter sequential improvement, adjusted EBITDA, you feel like you have enough visibility to give some sort of commentary as to when you’ll think — you’ll hit profitability and kind of how you’re thinking about that for the rest of this year and then maybe into 2023?
Geoffrey McFarlane
Yes. I mean, as you heard from our script in our earnings release, we’re not providing specific guidance, but it is clearly the number one priority for us as a business and what we’re squarely focused on. And so, hopefully, that, that tells you how big of a priority it is for us and how much we’re focused on it. And that should move up the timeline from what we’ve previously talked about historically.
Ryan Meyers
Great. That sounds good. I’ll hop back in the queue. Thanks, guys.
Operator
Thank you. Our next question comes from the line of Alex Fuhrman from Craig-Hallum Capital Group. Please go ahead.
Alex Fuhrman
Great. Thanks very much for taking my question. Wondering as you look to manage more to profitability and cash flow, what kind of opportunities are there still in front of you to really lean into and grow your brands that have already kind of gotten to the point of broad recognition? So obviously, I’m talking about Summer Water, but wondering if there’s any other brands that maybe as you look to pull back on experimenting with new brands, that that, maybe are ripe to kind of hit that inflection that, that Summer Water did. And then with regard to Summer Water itself, if you can talk about how some of the brand line extensions performed this summer? And do you still feel there’s a pretty significant runway just for that, that one breakout brand?
Geoffrey McFarlane
Yes. I’ll hand that one over to Brian.
Brian Smith
Yes. Thanks, Geoff. Then thanks for the question. In terms of Summer Water, we see continued growth. I mean, we certainly are achieving some scale that we are very excited about, but there’s still a large universe of addressable market and accounts that we’re working on and you can see the progress that we’ve made in adding unique accounts quarter-over-quarter versus last year. So there’s still a lot of room there.
Many of the line extensions are really focused on summerwater.com. So it’s really creating additional exclusive experiences for those guests and for Winc members. But the real focus for Summer Water is the single SKU the rosé, and of course, we sell that in multiple formats as well. So we’re still extremely bullish on this brand. It’s really resonating and continues to be the lead for us.
In terms of other brands where we’re seeing a lot of adoption by consumers, our wholesale partners and retail accounts are Pizzolato brand, which is in organic Prosecco. We mentioned organic growth in general expected to be at a CAGR of 10.4% in the U.S. over the next coming years. And Prosecco is a high-growth category within that subset. And we’ve seen some very strong growth in that brand. It is our second leading brand and is at an even higher growth rate. So we have a couple leading brands and organic specialization in the market, and we believe that will help us continue to strengthen the wholesale channel through our key driver, which is expanding accounts.
Alex Fuhrman
Great. That’s really helpful. Thank you very much.
Brian Smith
Thank you.
Operator
Thank you. Our next question comes from the line of Bobby Burleson from Canaccord. Please go ahead.
Bobby Burleson
Great. Thanks for taking my questions. So just curious on the DTC there’s been headwinds for a lot of guys out there, curious your assessment of how you performed maybe from a volume standpoint versus the broader kind of wine and spirits DTC performance?
Geoffrey McFarlane
Yes. Yes. I mean, we’re larger than a lot of the small wineries and direct-to-consumer across the whole category. So it’s a pretty fragmented space. So I think it’s pretty differentiated if you’re a small winery in Napa selling out of your tasting room versus the broad-based digital marketing and so all that gets thrown into the overall data.
But what we’ve seen is certainly media is more expensive and we are more focused on acquiring really profitable customers that that payback quickly and that generate cash for the business and overall profitability for the business rather than more top-line growth and longer payback of customers. So that’s the new customer side of things and what happened in Q2, as we mentioned, in the earnings script and the earnings release.
In addition to that, I would say that the overall cohort performance of the customers we’ve acquired over the last four years remain strong, purchases remain strong and AOVs, which is mainly driven by cart size and number of bottles that that our customers are adding to their overall orders continues to increase. So we’re seeing really solid performance from our current customers and that’s a key driver.
I would also mention that Q2 and Q3 are seasonally, the slower times of the year for the business as people travel more; kids are out of school, et cetera. And then things begin to pick up seasonally for us in December or in really Q4 and then that follows into the winter season when it’s colder. So we will — we typically see seasonally pick up in those time periods.
Bobby Burleson
Understood. And then in terms of the AOV improvement, are there things that you’ve put on the platform that are more responsible for that growth and kind of what’s your sense of what’s going to drive that growth going forward?
Geoffrey McFarlane
Yes, yes. I mean there’s certainly — there’s definitely going to be a cap to that. I don’t think 17% quarter-over-quarter improvements going to be something that we can continue to maintain, but we — what’s driving it is, as our customers get older and as we have a more core base of users, those customers order more and they’re really great core customers. And so that’s really a key part of what’s driving it.
And then as far as our long-term outlook, as we continue to develop a greater portfolio of products, which we’ve been focused on through the Natural Merchants acquisition last year, as well as some of the new products like the Summer Water, orange wine that that’s releasing soon, things like that as customers fall in love with more and more of those products, they come back and shop for those products more often driving up AOV. So those are — that’s really the long-term belief with us is continuing to build a great portfolio of products that should increase customer retention and AOV.
Operator
Thank you. Our next question is from the line of Andrew Macpherson from [indiscernible] Securities. Please go ahead.
Unidentified Analyst
Hi, good morning. Quick question. Wanted to see if you could speak to the current valuation differential between yourself and the publicly traded comps and steps the management is taking to address that.
Geoffrey McFarlane
Yes. Look, I mean, it’s hard for us to fully understand exactly what drives the market. Our focus as I think we’ve been clear in the earnings script and what we’ve been talking about on today’s call is really a focus on profitability and a focus on improving the liquidity of the business. And I think as we show continual improvements in those two areas we will — we should trade closer to the comps. So that’s the really the core focus for us is just lean in on our balance sheet, turning more of our inventory into cash and then moving towards profitability. And then I think as we prove that out, we can move more towards comps. So that’s really management’s focus.
Unidentified Analyst
Got you. And at this point, are you seeking strategic alternatives to additionally enhance shareholder value?
Geoffrey McFarlane
Yes. Of course, as we’re a small cap growth company, we’re always seeking interesting opportunities and possible options. And so we remained focused on the organic business, but of course, we’re considering the all options at this point.
Operator
Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And now I would like to turn the conference over to Geoff McFarlane, CEO, for closing comments.
Geoffrey McFarlane
Thanks so much. We really appreciate everyone’s time today on today’s call. And we look forward to continuing to deliver for our shareholders.
Operator
Thank you, sir. The conference of Winc, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.
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