Naked Wines PLC (AIM:WINE, OTCQX:NWINF) is “traversing a tightrope on a cliff edge”, but the strategy seems to be working.
That was Liberum’s assessment of the online wine retailer’s market position in the wake of today’s third-quarter trading update.
Sales declined 10% year-on-year in constant currency sales, an improvement from the 18% dip experienced in the first half of the financial year.
A key highlight from the update is the 35% increase in new customers acquired, a significant leap supported by a 70% rise in investment for new customer acquisition.
The company has initiated cost-saving measures, including a workforce reduction, aimed at reducing the annual run rate of selling, general and administrative expenses by £7 million, targeting a range of £30-33 million by the end of 2025.
“We appreciate the strategy to get Naked Wines on a solid footing and the further £7 million of cost-cutting announced is welcome news," said Liberum analysts.
They added: “While inventory reduction is too slow in our view the shrinking of the business is purportedly being managed in such a way as to not derail the profit and loss and cash flows.
"We are not near the position where we can talk about building equity value but still in an environment where shoring up the balance sheet is key and finding a stable position on which the group can eventually grow."
Liberum outlined two sticking points when it comes to Naked Wines’ valuation, namely the scale of new customer investment and the face of inventory reduction.
"Running the business for cash does mean they are willing to accept low paybacks on new customer spend and this helps with inventory reduction but it is not sustainable," said the bank.
However, Liberum acknowledged that, since the reappointment of James Crawford as chief financial officer, “there has been significant work completed to shore up the finances and balance sheet of the group”.
“Against a backdrop of material revenue declines, cash burn has been stopped and cost-reduction plan is now well advanced.”
Liberum upgraded Naked Wines’ share from sell to hold following today’s results.