This is an update from a friend of mine who introduced me to Naked Wine when it was 200p. He had taken interest having seen Norbert Lou of Punch Card Capital invest. Norbert is worth research on his own and can be found here: https://taovalue.files.wordpre...
Punch Card Capital have recently increased their position in Naked Wine. My friend wrote:
Through the help of COVID the company has surpassed my very conservative targets, so I need to refresh my valuation. First, we need to look at what operating margins will be long-term as right now they are investing significantly for growth. In my write-up I use a very conservative 7% operating margin based on what a traditional wine retailer can achieve. Management was guiding to a 10% margin at the time. Now management are guiding to a “>10%” or a “10%-15” operating margin. This is what the CEO said in the last earnings call:
The way I think about this, if you start off from thinking about the economics of us selling wine to our members, so our repeat economics, and you see in the disclosure today that we make around 30% contribution margin on those sales, actually, that's been enhanced by 3 percentage points this year. And over the medium term, as we shift the mix more towards the U.S., you can see from the disclosure that, that is likely to be enhanced further as our repeat contribution margin is substantially higher in our U.S. market.
Effectively, that's the pool of cash that we call the profitability we're generating. And then from that, we're doing a couple of things. We need money to invest in acquiring new customers, and we need to pay our SG&A cost base. Over time, as we grow the business and achieve scale, we see material opportunity to drive leverage in the SG&A cost base. So you see that falling from probably about 14-or-so percent of repeat sales today to likely substantially under 10% as the business approaches some degree of maturity.
And then the amount of money we spend acquiring new customers, again, to have the business at a point of maturity or low single-digit growth, that investment level, again, likely falling to kind of sub-10% of repeat sales. So you kind of do your math, that 30%, you got up to 35%, knockoff, say, 8% or 9%, knock off another 10%, you get…
