Naked Wine Regulatory News (WINE)

7 December 2022

Naked Wines plc

("Naked Wines" or "Group")

Half Year Results for the 26 weeks ending 26 September 2022

Solid trading underpins pivot to profit

Half-year highlights:

● Total sales £166m, +4% on a reported basis and -3% on a constant currency basis1 vs H1'22

● Adjusted EBIT of £4.6m, nearly four times the prior year, reflecting pivot to profit

● £0.2m loss before tax is impacted by material inventory provisioning

● Net cash of £23m plus £41m of additional liquidity available from renegotiated credit facility

Nick Devlin, Group Chief Executive, commented:

"We announced in October our decisive plans to deliver profitability through reshaping our strategy. In the half we took the first steps to reduce our costs and drive improvements to our liquidity, profitability and unit economics in the near-term. Ultimately, we are laying the foundation for a return to our ambition of sustained, profitable growth, whilst also providing ourselves with greater resilience.

As expected, in the short-term the changes we have undertaken have reduced our sales trajectory, though the full impact of this will be seen in the coming periods. However, the strength of our business model is clearly visible through underlying retention rates that remain unchanged to pre-pandemic levels, our success in realising price uplifts and improving payback levels. We are at the peak in our inventory cycle and, with our destocking plan, we expect to generate cash in FY24 whilst protecting our winemakers as well as our Angel members. Currently, we are trading profitably in line with our expectations over the key holiday quarter and reconfirm our revised guidance for FY23 shared in October.

I am incredibly proud of the Naked Wines team who have worked together to help us achieve our reshaped plans, and continue to deliver outstanding wines to our customers. I want to thank them for their hard work in a challenging period."

Notes: 1) Constant currency basis (CCY) using current period FX for the translation of the comparative period. 2) Total sales and Contribution profit includes £4.0m of bulk wine sales and £0.4m contribution loss, not accounted for within new and repeat sales or contribution. 3) This is an alternative performance measure. See the 'Alternative performance measures (APMs)' below. 4) General & Administrative (G&A) includes share based payments (SBPs) and marketing research & development (R&D) expenses. 5) Adjusted EBIT is operating profit adjusted for amortisation of acquired intangibles, acquisition costs, impairment of goodwill, restructuring costs, profit on disposal of investment property, US inventory provision and write-off, Software as a Service configuration and implementation costs and fair value movement through the income statement on financial instruments and revaluation of funding cash balances held. 6) Adjusted PBT/(LBT) is defined as Adjusted EBIT less net finance income / (charges).

Guidance & Outlook

As announced in our Operational and Financial Update in October, we have reshaped our plans to deliver profitability at a sustainable level. Our plans also offer us the flexibility to choose whether to invest in growth when conditions permit or deliver improved margins.

Given the uncertain economic outlook into next year, we intend to continue to operate on a reduced cost base in FY24 with G&A costs benefiting from a full year of savings offsetting inflationary pressure.

Marketing costs will remain substantially lower than FY22 in FY24 unless we see a marked improvement in customer recruitment economics. Overall, we anticipate stronger profitability in FY24 as a result of our pivot to profit strategy. 

(1) Excluding profits from property disposal reported in H1 and other non cash adjusted items as analysed at the half year in note 4.

(2) G&A guidance of £42-44m for FY23 does not include share based payment charge or marketing R&D costs.

(3) Revised guidance has been provided based on a 1.15 GBP/USD rate for future planning purposes.

Naked Wines plc will host an analyst and investor conference call at 9am GMT / 4am ET / 1am PT on 7 December 2022. The briefing will be webcast using the following link: https://stream.brrmedia.co.uk/broadcast/637f84fe67d69d6f0706575aAlternatively, it can be found on our website. A recording will also be made available after the briefing on our results in the announcements section of our investor website.

For further information, please contact:

Naked Wines plc

Nick Devlin, Chief Executive Officer

James Crawford, Chief Financial Officer

Clara Melia / Chris MacDonald IR@nakedwines.com

Investec (NOMAD & Joint Broker)

David Flin / Carlton Nelson / Ben Farrow Tel: 0207 597 5970

Jefferies (Joint Broker)

Ed Matthews / David Genis / Gill O'Driscoll Tel: 0207 029 8000

Instinctif (Financial PR)

Guy Scarborough / Damian Reece Tel: 07917 178 920 / 07931 598 593

About Naked Wines plc

Naked Wines connects everyday wine drinkers with the world's best independent winemakers.

Why? Because we think it's a better deal for everyone. Talented winemakers get the support, funding and freedom they need to make the best wine they've ever made. The wine drinkers who support them get much better wine at much better prices than traditional retail.

It's a unique business model. Naked Wines customers commit to a fixed prepayment each month which goes towards their next purchase. Naked in turn funds the production costs for winemakers, generating savings that are passed back to its customers. It creates a virtuous circle that benefits both wine drinker and winemaker.

Our mission is to change the way the whole wine industry works for the better. In the last financial year, we served more than 934,000 Angel members in the US, UK and Australia, making us a leading player in the fast-growing direct-to-consumer wine market.

Our customers (who we call Angel members) have direct access to 268 of the world's best independent winemakers making over 2,200 quality wines in 22 different countries. We collaborate with some of the world's best independent winemakers like Matt Parish (Beringer, Stags' Leap) and 8-time Winemaker of the Year Daryl Groom (Penfolds Grange).

Chairman's statement

Introduction

This is my first opportunity to address shareholders as Chairman of Naked Wines. I am excited at the opportunity to help the business in dealing with its immediate challenges as well as unlocking the longer term potential.

Business strategy

As outlined in our recent Operational and Financial Update, and as explained further by Nick Devlin our Chief Executive in his review below, Naked has confronted recent underperformance and liquidity concerns by committing to a clear plan for the medium term.

First, we have begun to undertake a series of measures to demonstrate that the business model is profitable and can generate cash at its current scale. We are already able to point to an improvement in profitability; this will continue and cash generation will follow in FY24. Second, we recognise that delivering a base level of profit is necessary but unlikely to be sufficient on its own to attract new investors. We therefore continue to work hard to find opportunities to invest for growth at attractive payback levels.

Our aim is to demonstrate profitability from FY23 and cash generation from FY24, and to have high confidence that we can invest more heavily for growth from FY25.

Financial strategy

There has been much debate in recent years as to whether Naked should deploy excess capital to purchase its own shares. I have no philosophical objection to buying back shares. Indeed, during my executive career as CFO of Dunelm Group, we several times distributed excess cash to investors via special dividends, and regularly ran share buyback programmes (albeit these were aimed at acquiring shares for use in fulfilling options granted under incentive schemes).

So, the Board will contemplate share buybacks or other distribution mechanisms when appropriate to do so - but it will be sensible to be cautious in times of high economic uncertainty such as the present. In any event, our priority in the immediate future is to ensure that adequate liquidity is available to sustain the business even in the event of a prolonged economic downturn.

Board focus

The Board's primary role is to support management in delivering the agreed strategy and financial results as effectively as possible. I intend that the focus of the Board, in the near term at least, will be in providing strong oversight on delivery of results.

We do not intend for corporate activity to be part of our agenda for the near term. For example, there has been speculation that Naked might pursue a US listing, and it is true that possibility has been considered by the Board previously. However, it is firmly off the agenda for the foreseeable future.

Board changes

I would like to thank my predecessor, Darryl Rawlings, for his contribution to the business during his time as chairman. I wish Darryl every success. As announced recently, I am pleased to welcome Steve Bolton to the Board as a Non-Executive Director and chair of the Audit Committee. I look forward to his contributions.

I am grateful to Deirdre Runnette for stepping into the role of Senior Independent Director. In her short time on the Board to date Deirdre has already made a strong positive impact and I look forward to working more closely with her.

I am very pleased to confirm that James Crawford is to formally re-join the Board as CFO from today. In accordance with his longer term career aspirations, James stepped away from the CFO role and into a general management role in 2020. The Board is grateful to him for agreeing to return as Interim CFO after the departure of Shawn Tabak in the summer followed by his now permanent appointment, reflecting his strong commitment to the business.

We announced in September that Rowan Gormley (founder of Naked) would be acting as an unpaid adviser to the Board. We have been grateful to Rowan for his input, which has helped us to get to real clarity in addressing our near term performance challenges. Having got to this point, Rowan will now step away from active involvement with the Board.

Shareholder engagement

I believe that the best service I can give to shareholders is by helping the Board to function effectively and by ensuring that the business delivers the expected results. This is my immediate focus. I look forward to meeting shareholders to hear their perspectives on the company in the new year.

David Stead

6 December 2022

CHIEF EXECUTIVE REVIEW

Operating context

Without a doubt, 2022 has been one of the most difficult years in the history of Naked Wines. The operating environment across all our markets has been tough - with multiple factors placing significant pressure on all e-commerce businesses. We have not been immune to these challenges - we have seen:

● Digital marketing costs increasing as targeting effectiveness has fallen,

● Sustained inflationary pressure and disruption across our end-to-end supply chain,

● Inflationary pressure from a tight labour market impacting our G&A cost base,

● Pressure on real consumer incomes reflected in generational lows in consumer confidence.

On top of these challenges, it has become clear that the pandemic has not led to the sustained inflection in the rate of online migration that we envisaged and that customer recruitment activity we undertook in FY22 has delivered lower payback than we had anticipated at the time.

Impact on Naked Wines

As a result we have faced three main challenges in the period:

● It has been harder to find places to deploy capital at attractive returns in acquiring new members so we have been unable to deliver the growth we anticipated when we planned the year and,

● We have material excess inventory levels as a consequence of our pivot to profitability reducing current and future expected sales,

● Credit facilities we had negotiated with a view to supporting growth were not appropriate to manage the challenges of a slowing business with fewer immediate investment opportunities.

With the change in the economic outlook and the impact on Naked's key metrics it became clear this summer that a change to our strategy was required. Whilst we remain convinced of the long-term growth potential for our proposition, and indeed we continue to see the benefits of a business that has almost doubled in size since the onset of the pandemic, it was important that we revisit the best way to allocate capital in today's operating environment.

That is the context for the "Pivot to Profit" that we announced in October, with a focus on increasing liquidity, delivering higher profitability and ultimately cash generation over the next 2 years. I firmly believe this plan will give us the surest foundation to deliver on our mission to change the way the wine industry works for the better.

Pivoting to Profit

We started our pivot to profit during the latter part of the reporting period, and announced our full plans at our operational and financial update in October. We have taken a set of decisive actions to confront the challenges described above.

1. We ended H1 with available liquidity of £64m with revised credit facility covenants to support delivery of the revised strategy as well as offering considerable downside protection. See Note 8 for further details of the revision to the credit facility.

2. We increased Repeat Contribution margins in our key US segment, as we successfully mitigated inflationary pressure and rolled out pricing changes based on our Australian pilot last year.

3. We initiated a plan to deliver an orderly reduction of inventory levels over the next 18 months with future inventory commitments reduced to well below anticipated customer demand:

a. Reduced inventory intake achieved through a combination of rephasing and renegotiating arrangements with winemakers. Importantly, we have done this in a collaborative and balanced way to protect winemaker livelihoods and our long-term partnerships

b. Liquidated excess inventory through an increased level of bulk wine sales

4. We reduced our marketing costs by 44% year on year with benefits of improved efficiency showing in rising payback rates through the period

5. We completed a restructuring exercise in the summer with 32 roles removed as we streamlined our teams and reset our operating scale

Demonstrable progress on the pivot to profit is reflected in a record first half adjusted EBIT of £4.6m, an increase of 283% vs prior year, predominantly delivered in our 2nd quarter as we saw early dividends from our revised trading approach.

These changes have not been easy, but the path we have outlined represents the right plan for Naked Wines and all its stakeholders in today's environment. As a result the business benefits from enhanced liquidity, improved profitability and a clear path to sustainable cash generation. This positions Naked well in what remains a challenging and unpredictable economic and consumer environment while allowing us to continue to test and experiment, to sow the seeds for future growth as conditions improve.

The speed at which we have been able to pivot demonstrates the underlying strength of the Naked Wines model. In tough times Naked is delivering real value to both customers and winemakers. It is also testament to the level of commitment of our teams and winemakers around the world. In the face of some challenging circumstances, I am incredibly proud of the quality of execution that we have delivered, especially in our second quarter as we challenged the business to change direction.

The quality of execution is again visible in our internal operating KPIs, which have all held steady or improved in the half: with notable enhancements in availability and consistency of our delivery operations.

First half performance

The strength of our business model is clear from the results we are delivering in a tougher consumer environment.

Excluding our FY22 cohort, where quality suffered as we attempted to maintain customer numbers, our underlying sales retention rates by cohort and maturity level remain at or better than pre-pandemic. We believe this is ultimately attributable to consumers seeking value for money and our unique sourcing model providing world class wines at a better price than traditional distribution. Whilst aggregate sales retention fell slightly, as the last of COVID supported frequency of sales fell out of our numbers in our largest markets, we saw members redemption of their funds - via cancellation - fall to their lowest recorded levels.

The quality of our wine and service proposition have supported our passing through price increases in all our markets, enabling us to maintain contribution margins in face of increasing distribution costs. The first half has seen us bring a series of exciting new brand launches to market including the debut Willamette Pinot Noir from Ken Wright and the launch of Josh Pfeiffer and Jesse Katz's exclusive brands to UK Angel members. Our ranges continue to win plaudits from critics (IWSC Best Online Retailer, UK) and consumers alike (USA Today Best Wine Club, USA; People's Choice Best Wine Retailer, UK).

The action we have taken to reduce and refocus our marketing investment in recruiting new customers is translating to greater efficiency. As we have reduced investment levels, our 5-year forecast payback rates have increased towards the levels seen consistently pre-pandemic. The year 1 payback we report in this period reflects the poorly performing investments we made a year ago and we expect this metric to improve when it measures the return on the investment we are making now. The digital marketing environment remains challenging, and as a consequence our spend on digital channels has been scaled back substantially, with our mix more concentrated to offline and owned channels over the period. We have also increased introductory case prices, reducing our losses on first customer orders and driving a shift towards higher quality customers as a result. The early results are clear:

● Sales to new customers declined just 8% on marketing investment that declined 44%

● Our 5-year forecast payback progressively increased through the period (Q1 1.5x, Q2 1.9x).

● Early quality signals for the FY23 cohort are much improved, with sales per new joiner ahead +24% vs prior year

These results, integrated through our data led approach, have enabled us to return to growth in projected member lifetime value (LTV) with cohorts in key US and UK markets showing signs of materially higher quality vs this time last year. Against a tough consumer backdrop this is a key metric as our ability to consistently deliver payback against material levels of new customer investment requires us to increase member LTV.

1 5-Year forecast payback for H1'22 was revised down from 1.7x on account of weaker retention than anticipated and lower realised contribution margin.

Strategic Developments

Whilst we have been focused on our pivot to profit, we have continued to invest in a wide range of initiatives to ensure the business remains positioned for growth in the future when conditions improve.

Enhancing customer value

The surest path to sustained and profitable growth starts with enhancing LTV per new customer. At the start of the year we dedicated a team to work cross functionally with an aim to enhance our LTV through increased early activation and engagement. While there remains much to test and, as ever, not all our experiments have been successful, we have had some encouraging wins in the first half of the year. Amongst the highlights:

● An increase in early activation through reframing our introductory matching payment of an Angel member's first deposit and better on-site and in app presentation of that credit to new members

● Integration of our wine advisor team into the early customer lifecycle resulted in an over 1ppt increase in 90 day order rates

● Improved card acceptance rates and reduced cancellations through integration of a new payments platform

In total these small steps, alongside our focussed media investment, are translating into encouraging steps in member LTV which has increased 22% in H1 vs H1 FY22 with a continued increase in absolute value through the period.

Driving awareness

As consumer spending is coming under pressure it is critical that the benefits of the Naked are understood. We have an objective to enhance awareness, comprehension and quality perception of the brand across our markets.

Whilst we remain at the early stages of evaluating our brand marketing investments we are seeing encouraging lead indicators as key brand metrics around brand awareness and emotional connection show meaningful improvement. We intend to continue to iterate based on our early results and will be reflecting fully any brand marketing expense in our customer investment costs on an ongoing basis.

Range and quality perception

Our commitment to enhance quality perception through increasing range breadth and choices in premium categories is paying dividends. We have expanded our range with a focus on increasing coverage of "old world" classics in the UK and an emphasis on Luxury wines in the USA where year round access to a Luxury range has seen sales of wines priced over $25 a bottle increase 84% vs H1 of FY21. I can safely say the breadth, diversity and quality of our range has never been greater.

Sustainability

A focus on sustainability is at the core of our wine strategy. We continue to push to reduce the environmental impact of our business with continued progress in light weighting our glass bottles and development of seven unique boxed wines and through partnership with our winemakers. We have partnered with Sustainable Wine Australia to enable all our independent winemakers in Australia to achieve certified sustainable status and are testing new website functionality to allow our consumers to easily shop wines with lower environmental impact. We have achieved recognition for our efforts to champion sustainability in the wine industry in the period winning the prestigious Decanter Green Champion award in the UK.

The challenges of 2022 will highlight the models across our sector that have the resilience to be long-term winners. Our model, harnessing the power of connecting the world's best independent winemakers directly with over 900,000 wine drinkers has the differentiation required to be one of those winners. In tough times, more than ever, we are focussed on providing a platform to connect our winemakers to the world.

Nick Devlin

6 December 2022

FINANCIAL REVIEW

Group trading performance

Aggregate Group performance is strongly impacted by our pivot to profitability which has eliminated significant cost in marketing during H1, with a consequent reduction in sales to new customers. The mix shift between new and repeat customers has strengthened aggregate contribution margins.

Active Angel members in the first half totalled 934,000, a decline of 3% from the 964,000 reported at FY22 Year End. This decline in Angel members reflects the reduction of investment in new customers. In terms of the value of the customer base the reduction is offset, in part, by enhanced LTVs of new customers due to the change in marketing strategy.

First half revenue of £166 million was +4%, enhanced by the weakening pound. On a constant currency basis the trend was -3% with a sequential improvement in revenue between Q1 (-9% ) to Q2 (+4% ).

Gross profit during the period was £72 million, +9% albeit flat on a constant currency basis, with higher gross margins on new and repeat sales in all markets and positive mix shift towards higher margin repeat customers.

Fulfilment costs increased by 13%, well ahead of revenue, due to a combination of inflation in freight and labour costs in the fulfilment network and lower utilisation of fixed costs as order volumes reduced.

Contribution profit was £40 million, with a Contribution profit margin of 24%. This represents a 40 basis point increase over H1'22, again a reflection of the increased proportion of sales being made to repeat customers.

Advertising costs were £10 million, representing 6% of total sales, down 44% over H1'22, driven by the reduction in spend as we pivoted to profitability. Payback on this spend is forecast to be 1.7x over 5 years which, while still short of our targeted 2.0x, represents a strong positive shift in Q2 in particular. We also invested £3.8 million in Marketing R&D spend in the half, which has delivered us our first high quality production TV advertising trialled in the US and UK markets, backed up with outdoor billboard campaigns. This spend has delivered us improvements in a number of brand perception and awareness metrics in the test geographies and we continue to assess the impact over the medium-term before deciding whether to continue investing in this way.

Total general and administrative costs including marketing R&D and share based payment charges were £25.5 million, a £6.7m or 36% increase on H1'22 (28% in constant currency). The increase represents:

1. An increase of £4.3 million in administrative expenses due to a large number of roles hired during FY22, now fully embedded in the cost base, as well as salary inflation.

2. A £3 million increase in our marketing "R&D" spending, spent developing high quality TV adverts in both the UK and US markets which have been deployed in test areas and seen early success in driving awareness

3. A reduction of £0.6 million in share based payment charges to £0.5 million. The biggest driver of this was a significant release of the accrual for employment taxes on vesting which are determined in part by the prevailing share price.

With the business not growing our SG&A costs require reduction. The strategic review and subsequent reduction in headcount, announced in our pivot to profit, was only effective from August and October in the US and UK respectively so the benefits of the initiative will be realised with minimal cost growth anticipated in the second half of FY'23.

Adjusted EBIT was £4.6 million, nearly four times the adjusted EBIT of H1'22 largely as a result of our implementation of our pivot to profit strategy during the period.

Within adjusted items of £4.8m, one-off costs during the period totalled £10.5 million, with approximately £1.2 million of costs relating to G&A restructuring, £1.4 million relating to Software as a Service (SaaS) configuration costs incurred in the implementation of the new ERP platform and another £7.9 million in costs relating to expected losses on disposal of excess inventory and costs of exiting wine purchase agreements as a result of our change in strategy in the year. A one-off gain of £4.8 million was realised on the sale of the freehold property retained on the disposal of Majestic Wine Warehouses Limited in December 2019.

All of these amounts have been treated as adjusted items on the basis they relate to activity outside of our normal operating model, have limited predictive value, are expected to be non-recurring and materially impact the reported performance of the business. We consider the material inventory provision to meet our accounting policy criteria for adjusted items due to its size and our view that it is one-off in nature as part of our pivot to profit strategy change. Management considers the historical purchase of this inventory supported the group's previous strategy of customer growth and that our change of focus to profit improvement results in the Group not being able to sell that wine through normal channels and as such, should be included within our adjusted items. This provision reflects our expectations on recoverable amounts for this inventory in the secondary market and going forwards we do not expect to recognise significant levels of inventory provision as we align our wine purchasing to revised expected forecast revenues.

Other adjusted items totalled income of £0.9 million, being the net of fair value movement on foreign currency items and scheduled amortisation of acquired intangibles.

Net finance costs were £nil (H1'22: net finance income of £0.5 million) during the period, with interest charges on the Group's credit facility broadly offset by income accrued on the vendor loan note.

Loss before tax of £0.2 million was down from the £1.3 million profit reported in the prior year.

Tax of £0.3 million has been charged to the P&L (H1'22: £0.3 million), an effective tax rate of -120%, driven by taxation on underlying business unit trading profits before corporate costs.

1 Constant currency basis using current period FX for the translation of the comparative period.

2 General and administrative costs reported here are as per the reported income statement of £27.1m after excluding £0.6 million of acquisition related amortisation costs, £1.2 million of restructuring costs, £1.4 million Software as a Service implementation expenses, offset by £1.5 million of fair value adjustments relating to open FX contracts (see note 4 for further information on these items).

H1'23 Detailed Performance

New and Repeat Customer breakdown

New Customers

Investment in New Customers was £11.7 million (H1'22: £21.3 million), including New Customer Contribution loss of £1.7 million and advertising costs of £10.0 million. This material decrease in investment reflects the decisions to focus on profit and reduce investments due to falling payback. 5-year Forecast Payback was 1.7x, with payback in Q2 (1.9x) significantly improved versus Q1 (1.5x) as the impact of the revised strategy started to be realised. Payback improvements have been seen since the pivot to profitability driven by materially reduced costs per acquired customer and enhancements in the forecast Lifetime Value of acquired customers.

Repeat Customers

Repeat Customer sales were £148.4 million, a 3% increase on a reported basis over H1'22, or a decrease of 4% on a constant currency basis. Our active Angel member base declined to 934,000, a decline of 3% from the 964,000 reported at FY22 year end. Repeat Customer sales retention was 76%, a decrease over H1'22 reflecting lower sales per Angel member as the higher Covid purchasing frequency seen in early H1'22 has normalised back to pre-pandemic levels.

Repeat Customer Contribution profit was £42.2 million, a 2% increase over H1'22 on a reported basis, -6% on a constant currency basis. Repeat Customer Contribution margin was 28.4%, a 10 basis point decrease over H1'22 despite significant inflationary pressure on fulfilment costs, demonstrating the impact of our price increases, cost containment in our supply chain and the benefits of business mix moving towards the USA.

Standstill EBIT

We strive to allocate capital responsibly to grow the business through marketing investments where returns are available in excess of our cost of capital. Over time that builds a growing base of our subscribers and builds underlying profitability. That profitability may be consumed by the investment we make in Growth, as it has been historically, or may be visible in our profit and loss statement, as we expect it to be in this financial year. We show our estimate of the potential profitability of the Group using a metric we call Standstill EBIT. This is a calculation of how much marketing spend is needed to maintain static levels of contribution from repeat customers using historic metrics of retention and investment performance, and the resultant EBIT impact if only that marketing spend were to be deployed. The metric is calculated on a rolling 12 month basis so we have compared the result to the result reported at end FY22.

The calculation of Standstill EBIT at this reporting period shows a loss of £5.0 million (profit of £37.2 million in H1'22). Clearly this is not an acceptable outcome but demonstrates the effectiveness of the calculation in diagnosing the issues in the business that our pivot to profitability addresses.

The drivers of the movement versus the calculation at the end of FY22 are as follows:

Our new customer investment returns were abnormally and unacceptably low in FY22 and this is reflected in the calculation through low year 1 payback . As we have reduced investment levels through our pivot to profitability, and started to see improving forecast 5-year paybacks as a result, we are confident that this input will improve in FY24 when it will show the payback on this year's investments. This improvement, combined with our moderating growth in G&A costs, is expected to materially improve the Standstill EBIT position in FY24. We expect to deliver adjusted EBIT margins in FY23 of 2.5-4% with further improvement in FY24. As a result FY24 Standstill EBIT and adjusted EBIT should show significant convergence over the next 18 months.

Segmental Trends

The US, our largest operation by revenue and potential, delivered 1% constant currency sales growth during the first half. This included a sequential improvement in sales growth from the first to second quarter, with positive price increases being absorbed by consumers and contribution margins ahead of plan. Sales of bulk wine as we started destocking delivered £4 million of sales at a contribution loss of £0.4 million. A 41% reduction in new customer investment impacted revenue, partially offset by the increased focus on reactivating lapsed customers through email and other targeted marketing at substantially lower cost than brand new customer recruitment. Due to falling payback, the reduction in investment was made at the beginning of the half whilst the reduction in G&A was only in effect from August. Together, both decisions supported the increase in adjusted EBIT to £10 million, +170% vs prior year.

During the period, our UK operations remained robust with only a 6% decrease in sales despite a 72% decrease in new customer investment. Whilst price increases helped mitigate rising costs, fulfilment cost increases and lower utilisation of fixed costs resulted in a contribution margin decline. Despite this, our scale and mature operations delivered £6 million in adjusted EBIT during the period, +66% vs prior year. This reflects both the strength of our operations and the loyalty of our Angel member customer base.

In Australia, the later reduction in COVID driven sales has resulted in an organic decline for the period, as they lap a prior period of increased at-home consumption. Price increases for repeat customers were introduced in the second half of FY22, helping to offset rising fulfilment costs through H1'23, resulting in a flat contribution margin.

1 Constant currency basis using current period FX for the translation of the comparative period.

2 Sales in the US included £4.0m of bulk wine sales, with a £0.4 million contribution loss. For further details see Note 3.

Balance Sheet Overview and free cash flow

Net cash at period end was £23 million, versus £40 million at end March 2022 as we deployed cash into inventory.

The change in FX rates since our last reporting in March 2022 has had a significant impact on our balance sheet, as described below.

Inventory at period end was £210 million compared to £142 million at end March 2022. Of the £67m reported increase, £21 million relates to FX variance and £46 million is an underlying movement including a one-off provision against expected losses on excess stock of £7.9m. This increase reflects an overstock position due to high levels of intake commitments made to reverse low availability seen during the pandemic arriving as we have taken the decision to pivot to profitability and protect investment returns. As outlined in the 20 October 2022 Operational and Financial Update we have well advanced plans to reduce this over the coming 12 months with current levels of committed and planned purchases in FY24 approximately £40 million lower than anticipated COGS.

Deferred income, predominantly funds in Angel member accounts, rose by £12 million in the last six months to £87.7 million. The majority of this increase is driven by FX changes as Angel member numbers have not grown. Average balance per Angel member has increased as we have a higher proportion of Angel members with longer tenure, giving a longer period for the balance to build.

Trade and other payables increased by £28 million to £83 million. Of this increase £7m is due to FX changes, with the underlying movement of £22 million driven by timing of stock movements and payments.

The Group consumed £23 million of cash in its operations in the period, funded from cash on hand, the sale of the freehold property retained from the disposal of Majestic and our credit facility. We have continued to allocate significant capital into inventory to support our community of winemakers as the business adjusts its growth outlook from that contemplated during the pandemic as well as delivering enhancements to the range and availability levels that we present our Angel members. We expect to continue to consume cash during H2 of FY23 which is fully supported by available liquidity.

At the present time we do not consider the business to be holding excess capital and no returns to shareholders, through dividends or buybacks, are planned.

Going Concern

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and operate within its borrowing facilities and covenants for a period of at least 12 months from the date of approval of the half year report. Accordingly, the financial statements continue to be prepared on a going concern basis.

Following the material uncertainty identified over going concern relating to the Group's credit facility profit covenant at the time the FY22 Annual Report and Accounts were approved, the Group met all covenant requirements at both the June 2022 and September 2022 quarter end dates.

As a result of the change in business strategy set out in the Chief Executive's Review, management prepared revised budgets and cash flow forecasts for the 18 months to March 2024 to reflect the change in focus from customer growth to profit improvement. Key actions to deliver the strategy and included within the revised budget and forecasts are:

● Forecast full year new customer investment levels have been reduced by at least £17m in reported currency in FY23 and are assumed to remain around this lower level during FY24

● Over £5m of annualised planned general and administrative cost ('G&A' cost) has been removed from the business through a restructure of personnel

● The Group's credit facility profit covenant, previously relating to repeat contribution profit, was renegotiated in October 2022 and is now based on a "facility defined adjusted EBITDA" which has considerable headroom in the base case scenario and which is not challenged in the severe but plausible downside scenarios modelled as part of the reforecast process, thereby ensuring access to the credit facility in all scenarios

● A destocking program is in progress to materially reduce future purchase levels during the remainder of FY23 and FY24, resulting in reducing inventory levels from the second half of FY24 onwards.

These actions result in a base case forecast with significantly higher level of profitability in the near term despite lower sales and increased inventory holdings (versus previous forecasts) which are supported by the revised credit facility.

Alongside the base case forecast, management has performed sensitivity analysis on severe but plausible downside scenarios in all three of its core markets:

● downturn of repeat customer activity requiring increased discounting resulting in a sustained reduction in repeat contribution margin of 50bp across the Group,

● sustained reduction in new customer growth of 20% against forecast; and

● a prolonged period of sustained customer attrition using the highest observed FY2023 attrition rates to date.

Management has assessed liquidity and covenant compliance against these downside scenarios and in all cases the Group maintains headroom against all financial covenants under the credit facility during the going concern period.

Management has further prepared a reverse stress test against the credit facility covenants and note that given the projected headroom over the covenants (and the Group's ability to manage cash), management considers the likelihood of breaching its facilities to be remote.

Management has also identified certain mitigating factors within their control if performance deviates materially from the base case forecast which could result in a period of lower profitability and/or reduction in liquidity which in turn could risk covenant breaches. These include additional short-term reductions in marketing investment levels, further reductions in wine commitments and reductions in discretionary payments if targets are not met. 

On the basis of this analysis, the financial statements continue to be prepared on a going concern basis and as at this reporting date there is no material uncertainty relating to going concern.

James Crawford

6 December 2022

Independent review report to Naked Wines plc

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 26 September 2022 which comprises the profit and loss account, the balance sheet, the statement of changes in equity, the cash flow statement and related notes 1 to 9. 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 26 September 2022 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the AIM Rules of the London Stock Exchange.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom (ISRE (UK) 2410). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with United Kingdom adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusion Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed. 

This Conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410; however future events or conditions may cause the entity to cease to continue as a going concern. 

Responsibilities of the directors

The directors are responsible for preparing the half-yearly financial report in accordance with the AIM rules of the London Stock Exchange.

In preparing the half-yearly financial report, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so. 

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly financial report, we are responsible for expressing to the company a conclusion on the condensed set of financial statements in the half-yearly financial report. Our Conclusion, including our Conclusion Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report. 

Use of our report

This report is made solely to the company in accordance with ISRE (UK) 2410. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

Cambridge, England 

6 December 2022

Unaudited consolidated income statement

For the period 26 weeks to 26 September 2022

Unaudited consolidated statement of comprehensive income

For the period 26 weeks to 26 September 2022

The total comprehensive income for the period and the prior periods is wholly attributable to the equity holders of the parent company, Naked Wines plc.

Unaudited consolidated statement of changes in equity

For the period 26 weeks to 26 September 2022

Unaudited consolidated balance sheet

As at 26 September 2022

We confirm that to the best of our knowledge:(a) the condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting";(b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first 26 weeks of the year); and(c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

James Crawford

Chief Financial Officer6 December 2022

Unaudited consolidated cash flow statement

For the period 26 weeks to 26 September 2022

Notes to the condensed consolidated financial statements (unaudited)

1. General information

Naked Wines plc is a public limited company ("Company") and is incorporated in the United Kingdom under the Companies Act 2006. The Company's ordinary shares are traded on the Alternative Investment Market ("AIM").

The registered office is The Union Building, 51-59 Rose Lane, Norwich, NR1 1BY.  The Group's principal activity is the online retailing of wines, beers and spirits. The Company's principal activity is to act as a holding company for its subsidiaries.

2. Basis of preparation

The annual financial statements of the Group are prepared in accordance with the International Financial Reporting Standards and International Accounting Standards as issued by the International Accounting Standards Board (IASB) and Interpretations (collectively IFRSs).

These condensed consolidated financial statements have also been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and except as described below, the accounting policies set out in the annual report for the year ended 28 March 2022.

Implementation of IFRIC agenda decision and new accounting policy 

During the year, the Company revised its accounting policy in relation to the treatment of upfront configuration and customisation costs incurred in the course of implementing Software-as-a-Service (SaaS) arrangements. This was in response to the IFRIC agenda decision clarifying its interpretation of how current accounting standards apply to these types of arrangements published in April 2021. The new accounting policy is presented below. This change in accounting policy has resulted in costs of £1.4m being expensed to administration expenses during the six months ended 26 September 2022 that would previously have been capitalised as intangible assets under the former policy. In the statement of cash flows for the six months ended 26 September 2022, £1.2m has been presented within net cash flows from operating activities that would previously have been presented within net cash flows used in investing activities under the former policy. The Group has not capitalised material amounts in relation to the configuration and customisation of Software-as-a-Service arrangements prior to this period and as such no prior period adjustment is required. 

Policy for Software-as-a-Service (SaaS) arrangements 

SaaS arrangements are service contracts providing the Company with the right to access the cloud provider's application software over the contract period. Costs incurred to configure or customise, and the ongoing fees to obtain access to the cloud provider's application software, are recognised as operating expenses when the services are received. Where costs are incurred for the development of software code that enhances, modifies, or creates additional capability to existing on-premise systems as part of a SaaS implementation are readily identifiable and meets the definition of and recognition criteria for an intangible asset these costs are recognised as intangible software assets and amortised over the useful life of the software on a straight-line basis

The information for the year ended 28 March 2022 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The condensed set of financial statements included in this interim report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting". The condensed financial statements are not statutory accounts. The financial reporting period represents the 26 week period to 26 September 2022 and the prior period, 26 weeks to 27 September 2021.

Going concern

As detailed in the Financial Review, the Directors have prepared these interim financial statements on a going concern basis.

In reaching this conclusion, management has considered the forecasts, sensitivities and mitigating actions available and have given regard to the risks and uncertainties to which the Group is exposed. On this basis, the Directors have reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and to operate within its borrowing facilities and covenants for a period of at least 12 months from the date of approval of the half year report. Accordingly, the financial statements continue to be prepared on a going concern basis.

3. Segmental reporting

IFRS 8 requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision Maker (CODM). The CODM has been determined to be the Executive Directors of the Company. This is on the basis that the Executive Directors have primary responsibility for the allocation of resources between segments and the assessment of performance of the segments.

In line with the information presented to the Executive Directors of the Company, the Group presents its segmental analysis based on the three geographic locations in which the Group operates. Performance of these operating segments is assessed on revenue, adjusted EBIT (being operating profit excluding any adjusted items) and adjusted PBT (being profit before tax excluding adjusted items), as well as analysing the business between New Customer and Repeat Customer lines of business.

These are the financial performance measures that are reported to the CODM, along with other operational performance measures, and are considered to be useful measures of the underlying trading performance of the segments. Adjusted items are not allocated to the operating segments as this reflects how they are reported to the CODM.

The table below sets out the basis on which the performance of the business is presented to the CODM. The CODM considers that, as a single route to market and solely consumer facing business in three geographically and economically diverse locations, the business comprises three operating segments. The Group reports revenue from external customers as a single product group being wine and associated beverages.

Costs relating to global Group functions are not allocated to the operating segments for the purposes of assessing segmental performance and consequently global costs are presented separately. This is consistent with the presentation of those functions to the CODM.

Revenues are attributed to the countries from which they are earned. The Group is not reliant on a major customer or group of customers.

The Group is subject to seasonal fluctuations resulting in varying profits over the full year period. The Group experiences increased sales in the third quarter which covers the holiday period, accounting for c.40% of total sales compared to c.20% in each of the other quarters.

1. General and administrative costs - Per income statement of £27,148,000, excluding charges of £631,000 of acquisition related amortisation costs, £1,174,000 of restructuring costs, £1,435,000 Software as a Service items for upfront configuration and implementation costs, and credits of £1,551,000 of fair value adjustments relating to open FX contracts and £10,000 of PLC company foreign exchange revaluations.

1. General and administrative costs - Per income statement excluding £690,000 of acquisition related amortisation costs, and credits of £227,000 of fair value adjustments relating to open FX contracts and £34,000 of PLC company foreign exchange revaluations.

1. General and administrative costs - Per income statement excluding £1,321,000 of acquisition related amortisation costs, £1,091,000 of fair value adjustments relating to open FX contracts and £139,000 of PLC company foreign exchange revaluations.

4. Adjusted items

The Directors believe that adjusted profit before tax measure provides additional useful information for shareholders on trends and performance. These measures are used for performance analysis. Adjusted profit is not defined by IFRS and therefore may not be directly comparable with other companies' adjusted profit measures. It is not intended to be a substitute for, or superior to IFRS measurements of profit.

The adjustments made to reported profit before tax are:

Amortisation of acquired intangibles

These items reflect costs of customer acquisition from prior to the purchase of the Naked Wines business in 2015. In order to reflect the cost of current New Customer acquisition in its adjusted PBT, the Group includes the expenses of all ongoing customer acquisitions in its adjusted profit measures but removes the amortisation cost of those customers acquired before acquisition by Naked Wines plc.

US inventory provision and write-off

As a result of the Group's pivot to profit strategy as detailed in the Chief Executive's review, management has identified material excess inventories in the US business that are expected to be realised at amounts lower than their carrying value. Therefore a provision has been recognized against these inventory items based on recoverable amounts achieved during the first six months of FY2023 or latest expectations of recoverable amounts where necessary. The inventory provision relates to three categories of wine:

1) Bulk wine for which management has decided not to incur additional costs to bottle based on anticipated lower demand and will be sold on the secondary market at the prevailing market price at the time of disposal which is expected to be lower than cost

2) Wine purchased during the Covid-19 pandemic in order to support wine makers whose route to markets had disappeared because of widespread closures in the hospitality industry and where post Covid sales demand has fallen

3) Excess inventory purchases committed in previous financial periods based on management's expectations for growth that has not materialised

Management considers these provisions to be one-off in nature as amounts relate to purchases made on the back of continued expected growth following the Covid-19 pandemic and based on the Group's previous strategy of customer acquisition. As a result of the strategic shift from customer acquisition to profit improvement, this provision forms part of the one off exercise to better align purchasing and inventory management going forwards whilst still ensuring the Group holds sufficient inventory to meet customer demand. 

Management has concluded it is appropriate to include the provision and write off within adjusted items to provide a more consistent basis with the comparative adjusted profit APM.

Profit on disposal of investment property

In May 2022, the sale of the asset classified as held for sale was completed. The profit arising on the sale is the difference between the proceeds of £5,850,000 less commissions and costs of £226,000 and the carrying value of the asset of £810,000. The profit is recognised in the Income statement and disclosed within adjusted items.

Restructuring costs

Termination payments and associated costs incurred in the US and UK following a review of the Group's operating structure.

Software as a Service costs

During the year the Group incurred upfront configuration and implementation costs relating to the introduction of a new Netsuite ERP system which is expected to go into production in Q1 FY24. Under the change of accounting policy set out in Note 2 these costs are reported as incurred in the income statement. As a once in a generation change in ERP platform these costs have been disclosed as an adjusted item.

Fair value movement on foreign exchange contracts and associated unrealised foreign currency inventory

We commit in advance to buying foreign currency to purchase wine to mitigate exchange rate fluctuations. International accounting standards require us to mark the value of these contracts to market. As this may fluctuate materially we adjust this and associated foreign currency inventory revaluation out as to better reflect our trading profitability.

Foreign exchange movements on plc company currency bank accounts

The Group holds net cash on its balance sheet and this includes sums of foreign currency which it will deploy to fund its US and Australian businesses. At each balance sheet date, the FX revaluation of foreign currency balances held in the Company are reported as adjusted items so as not to distort the picture of the underlying business cost base.

5. Tax

Tax for the 26 week period is charged at an effective tax rate of -120% (26 weeks to 27 Sep 2021: 23.3%) representing the best estimate of the Group's expected annual effective tax rate, applied to the profit before tax of the period. This tax charge is driven by profits earned in the US and Australian markets.

6. Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue of the Company, excluding 233,227 shares (Sep 2021: 130,868) held by the Naked Wines plc Share Incentive Plan Trust (which have been treated as dilutive share based payment awards).

The dilutive effect of share options is calculated by adjusting the weighted average number of ordinary shares in issue to assume conversion of all dilutive potential ordinary shares. All outstanding share based payment award grants have been included in the dilutive earnings per share calculation as they are potentially dilutive at the period end.

A negative diluted EPS equals a negative basic EPS as it would have an anti-dilutive effect if the dilutive shares are included in the calculation.

If the Company's share option schemes had vested at 100% the Company would have 78,114,778 (Sep 2021: 75,316,108) issued shares.

7. Notes to the cash flow statement

8. Asset back lending facility

On 31 March 2022, the Group entered into a 36-month senior secured credit facility with Silicon Valley Bank as administrative agent and issuing lender for up to $60 million of credit based on the inventory held by Nakedwines.com Inc. The facility is secured against the assets of the Company. An indicative impact of the facility's financial effect was calculated and disclosed in note 31 of the FY22 Annual Report and Accounts.

On signing, the Company assumed three substantive financial condition covenants in relation to this credit facility. 

a) A facility defined minimum balance sheet current ratio test;

b) A facility defined minimum qualified cash balance of $20 million to be held with loan parties at all times;

c) A profit covenant calculated as a minimum repeat contribution level to be equal to or greater than facility defined quarterly contribution targets over the course of the agreement.

Cash and cash equivalents on the 26 September 2022 (28 March 2022: nil) includes the GBP equivalent of $20 million (translated at the FX rate prevailing at the balance sheet date) which relates to drawings from the Group's credit facility in order to maintain the Group's cash holding covenant requirement as well as the working capital needs of the Group. 

9. Event after the balance sheet date

On 19 October 2022, the Directors concluded a first amendment to the Group's asset backed lending facility where the original profit condition covenant was replaced by a new facility defined adjusted EBITDA profit test. This new covenant came into effect for periods beginning after 26 September 2022. 

The introduction of the revised covenant has no financial effect on the operation of the credit agreement. However, the Directors believe that this new profit covenant test provides significantly greater latitude to the orderly operation of the facility across a wide range of economic circumstances. 

Definitions and Customer experience KPIs

Alternative performance measures (APMs)