Sector financial performance:

This company, grouped into wineries sector of alcoholic beverage industry, is a wine producer.

As cost of wine (grapes) increased in the past two years, producers in this sector have all experienced increasing pressure on selling price, which may be the major reason of a general decline in demand and thus in increasing competition and spending on marketing during this period. The decline in demand has been also indicated by declining wholesale of those producers, which means that their retail customers experienced troubles in selling their products. Some of producer turned to maintain their own retail sale by intensive marketing. However, increasing marketing costs resulted from expanding their owned retail operation also dragged down their efforts in improving profitability. However, since this is growing sector with about 3% annual growth in the past 20 years, a positive prospective future driven by stronger demand for premium wines may still be expected.

We have seen a diversified performance in terms of improvement in gross margin from producers of wine in this sector. There has been a generally increasing pressure on companies’ margin due to increasing wine costs and competition. However, as the focus of some of companies shifted to their owned retail channels by cutting off low efficient wholesale business, gross margin seems to be improved while the whole profitability was not due to increasing expenses in expanding their owned retail channels.

The typical gross margin for companies focusing on retail sales channels is about 65% with SG&A% of about 53% and operating margin of about 11%. And the gross margin of wine producers relying on wholesale is about 34% with SG&A% of 25% and operating margin of about 10%.

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Company performance:

Its retail business seems to be healthy and growing.

For fiscal 2018 compared with 2017 (ended 20180630)

Sales increased 8.6% due to increase in retail sales after it sold off its wholesale business during this period.

For fiscal 2017 compared with 2016 (ended 20170630)

Sales decreased 16.5% due to decrease in wholesale resulted from non-recurring high sale of 2016 offset by increase of 3.3% in retail sales.

For fiscal 2016 compared with 2015 (ended 20160630)

Sales increased 20% due to increase in wholesale resulted from non-recurring high sale of 2016.

Improved gross margin (about 66% in 2018) come from sales shifting to retail sales due to selling off the wholesale business, which, while significantly increased its SG&A/sale%, brought positive cash flow for this company in 2018 with an about 6% operating margin of retail business only.

Stock price

Our relativity of valuation methods and analysis indicate that this stock is currently overvalued compared with its peers with an enterprise price/EBI ratio of 53 ($1.9/share) and enterprise price/sales ratio of about 2.  

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