Business context and reporting period
Willamette Valley Vineyards, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The Oregon winery sells through direct-to-consumer channels, including tasting rooms and its Wine Club, and through distributors. Management says direct sales generally earn higher margins. Wine Club membership increased by approximately 485, or 8.5%, to 6,200 during the first half.
Financial performance
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Net sales | $4.72 million; up 27.8% year over year | $8.63 million; up 29.5% |
| Gross profit / margin | $2.76 million / 58.5%, versus 60.7% | $5.06 million / 58.7%, versus 59.5% |
| Income from operations | $844,884; up 11.2% | $1.34 million; up 33.2% |
| Net income | $510,231, down 6.6%; diluted EPS $0.10 | $824,469, up 14.3%; diluted EPS $0.17 |
For the first half, cost of sales rose 32.1% to $3.57 million and selling, general and administrative expense rose 25.9% to $3.72 million. Management attributed higher operating expenses to retail-sales staffing and costs associated with the remodeled Hospitality Center, as well as distributor promotion. Cases of produced wine sold increased 24.0% to approximately 58,952. Direct sales and distributor sales both increased; growth in distributor sales was attributed in part to sales to large chain retailers.
Six-month operating cash flow was $1.43 million, compared with $1.17 million a year earlier. Investing cash outflow was $1.91 million, primarily for property, equipment, and vineyard development; financing cash inflow was $574,000. Cash increased by $98,348 to $618,109.
At June 30, 2015, working capital was $9.6 million and the current ratio was 6.35:1. Total assets were $31.13 million and shareholders’ equity was $22.27 million. Farm Credit Services debt, including its current portion, was $5.34 million, down from $5.50 million at year-end. The company also had a $490,834 non-interest-bearing installment note for farmland, payable in two equal installments in 2016 and 2017. The $2 million revolving credit facility had no borrowings, was fully available, and was in compliance with financial covenants.
Changes, outlook, and risks
Revenue and gross profit grew substantially, but gross margin declined year over year. Management cited increased distributor allowances as a principal reason, partly offset by a greater share of higher-margin direct sales. Quarterly net income declined despite higher operating income, primarily because 2014 included insurance proceeds for a wine spill that did not recur. The first-half net income increase likewise reflects stronger operations partly offset by the absence of those proceeds.
The company purchased approximately 42 acres in Washington’s Walla Walla AVA in April. In July, the board approved a new open-market repurchase plan of up to $250,000. In August, the company commenced an offering of Series A Redeemable Preferred Stock; the filing warns that the securities’ unusual structure and offering documents could expose the company to rescission, enforcement, litigation, and repayment liabilities.
No quantified earnings or revenue guidance is provided. Management believes operating cash flow and available credit will meet foreseeable short- and long-term needs, while cautioning that interim results are not necessarily indicative of full-year results. Risks identified include financing availability, grape supply and quality, weather, competition, distributor relationships, regulation, and general economic conditions. Management reported no material expected impact from ordinary-course legal proceedings and stated disclosure controls were effective, with no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether revenue growth and higher direct-to-consumer sales can be sustained while margins remain pressured by distributor allowances and rising selling costs.
- How much of reported growth reflects bulk wine sales, which increased materially from the prior year.
- Capital spending and liquidity needs following the winery and hospitality expansion, vineyard development, and Walla Walla land purchase.
- The terms, proceeds, redemption obligations, and potential liabilities associated with the Series A preferred-stock offering.
- The filing reports no outstanding revolver borrowings and covenant compliance at June 30, 2015; confirm those conditions remain current.