Sector financial performance:

This company, grouped into wineries sector of alcoholic beverage industry, is a wine producer selling wine by retail, bulk sales, and wholesale.

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:

This company’s sale has been continuously growing (6-8% annual growth) in the past several years attributable to increase in retail and wholesale.

For first nine months of fiscal 2018 compared with the same period of 2017

Sales increased 6.1% due to increase in tasting room and wholesales.

For fiscal 2017 compared with 2016

Sales increased 7.4% due to increase in all categories.

Sales increased by 8% and 20% in 2016 and 2015 respectively.

Presented amazing ability to control its production cost (gross margin is above 60%) and the gross margin seems to be increasing while increasing raw materials costs and lower selling products price. Its low changes in SG&A/sales% growth means that its sales growth heavily depends on spending on advertising. Therefore, while it possesses very high gross margin and continuously increased sales, we have seen declining cash inflow in 2017/18.

Stock price

Our valuation methods and analysis indicate that this stock is currently relatively slightly overvalued with an enterprise price/EBI ratio of 32 ($7.4/share) by the market considering the increasing costs of wine.