(3)   After adding back £616k for exceptional one off costs relating to the WMS implementation

CHIEF EXECUTIVE'S STATEMENT

Business overview

We continue to see adverse trading conditions and challenges impacting the sector, with well-documented inflationary pressures and cost of living issues affecting consumer spend and frequency of order.

In addition, as previously reported, the Group was impacted during the period by a number of one-off factors, including over the two weeks of national mourning following the passing of Queen Elizabeth II in September and the peak Christmas trading period. Internally, this involved teething problems with the implementation of our new Warehouse Management System (WMS) to support the operation of our two warehouses, and externally we saw the negative effects on the courier network following the postal strikes and bad weather leading up to Christmas. The issues surrounding the WMS implementation, in particular, resulted in significant exceptional one-off costs to the business, and necessitated an early sales cut-off one week prior to Christmas, leading to approximately £1.5m in lost revenue.

In the face of these challenges, the Group has remained strongly focused on the implementation of its strategy, including the acquisition of new customers through a number of channels onto our subscription schemes at a consistently low cost per recruit. Price increases have also been implemented where appropriate, to help mitigate inflationary pressures whist being mindful of minimising any impact on competitiveness and value. 

Despite the challenging environment, the underlying mechanics of the business are in good health, demonstrating the resilience of the core business model. This includes the Group's consistent focus on acquiring high numbers of new customers at low cost, increasing our loyal WineBank membership base, growing our B2B business channel, margin expansion in the repeat DTC channels (despite significant cost pressures) and the Group remaining debt free whilst maintaining significant cash reserves and a high-quality, appropriate level of inventory on the balance sheet. 

Trading overview

Revenue for H1 2023 was £33.6m (H1 2022: £40.6m). The Company delivered an underlying EBITDA of £1.4m (H1 2022: £3.9m). As previously announced, the reduction in sales over H1 coupled with the exceptional costs associated with the WMS implementation had a material impact on the profitability of the business. We estimate that, together, the one-off issues associated with the reduction in September trading and the early cut-off for Christmas impacted H1 revenue by circa £3.26m, whilst the profit lost from those sales negatively affected EBITDA by a further £1m.

Despite this challenging backdrop, the business acquired over 60k new customers over the first six months of the year with recruitment onto the flagship WineBank subscription scheme particularly strong (+21% year-on-year) leading to a total membership number of 142k, +9%. Cost per recruit was also well controlled, and ahead of expectations, at just £11.82 (H1 2022: £13.62).

The Commercial arm of the business continues to accelerate year-on-year, generating growth of +25% vs H1 2021 and 71% ahead of H1 2020 levels. In particular, our partnerships with Moonpig (+283% year-on-year) and Virgin Red (+77% year-on-year) performed strongly.

Gross margin achieved record levels through the DTC repeat sales channels despite the pressures on the dry goods element of a bottle of wine (eg glass, packaging, capsule, freight and filling). Margin increased through the core repeat channels to 41.1% from 40.4% in H1 2022 and from 38.9% in H1 2020. The flexibility of our open source buying model enables us to focus globally on the best quality/value ratios and we can configure the contents of our pre-mixed cases to achieve this.

The Group has maintained its very strong cash position, remaining debt free and providing the scope to assess new opportunities to invest in growth in what has become a significantly different consumer environment to that of 18 months ago.

Customer acquisition

Through its disciplined, focused and robust customer acquisition strategy, the Group has made great progress in attracting thousands of new recruits and in a consistent manner year after year. Over 60k new customers were recruited during the period, which was 4% ahead of the comparable period last year and a 24% LFL increase during Q2 (Q2 2023: 44,000; Q2 2022: 35,600).

Cost per recruit was also ahead of expectations, remaining low at £11.82 (H1 2022: £13.62). However, the competitive landscape and pressure on pricing has led to more competitive offers in the market, including a proportion of 6 bottle deals. This, alongside the rise in wine costs, has led to an increase in the fully costed cost per recruit to £20.51 (H1 2022: £11.75).  

The business was delighted to launch its partnership with Saga in mid-November and was encouraged to see over 2k members    taking advantage of the service over the lead-up to Christmas. This was ahead of expectations and a positive result in a short period of time.  

WineBank subscription scheme and customer behaviour

The key driver of repeat sales for the business is our WineBank subscription scheme. The total membership of the scheme hit record levels in the period, at 142k customers (up 9% from 130k in June 2022). WineBank customer deposits are also  at a record level for the end of December at £6.5m, up 25% from the same point last year.

Customers have remained loyal to the WineBank scheme but have lengthened the average period of time between orders in light of recent macroeconomic challenges. This trend in customer frequency of order has been  a key factor in the year-on-year fall in revenue through the main repeat sales channels, resulting in total H1 revenue from WineBank customers declining by 10.8% year-on-year, albeit still 65% ahead of H1 2020 levels.

The cancellation rate remains relatively stable and in line with long-term rates, at 17.8%. Whilst this has ticked up from 16.7% at the same point last year, this is a relatively small movement considering the dramatic change in consumer confidence and the trading environment. This also bodes well for when the cost of living crisis eases as it highlights our customers' loyalty to the scheme, despite them currently scaling back on their average spend per annum.

The trade rate for the full active customer base shows a similar trend, falling from 69.6% in H1 2022 to 68.4% in H1 2023, whilst the lapsed rate increased from 32.7% in H1 2022 to 34.7% in H1 2023. Given the significantly different consumer landscape these are relatively minor movements, and show the resilience of the customer base as a whole.

Given the shortfall in sales in H1 2023, there was a fall in the sales retention rate from 91% in FY 2022 to 80% in H1 2023, driven primarily by a reduction in order frequency as the customer retention rate fell less substantially, from 88% in H1 2022 to 84% in H1 2023.

Strategic partnerships

The Group continues to focus its efforts on forging strategic partnerships to help drive both its customer acquisition and its commercial channels. Partnerships with Moonpig, Avanti West Coast, LNER, Great Western Railway and Virgin Red have all been pivotal in driving revenue through the B2B channel and continuing its steady year-on-year growth.

Similarly, the customer acquisition channel has used partnerships as the core method to attract significant numbers of new customers to Virgin Wines. In particular, relationships with Currys, On The Market, Go Outdoors, Rail Delivery Group, O2, The Daily Mail and Saga plc (amongst many others) have underpinned our ability to deliver a substantially increased number of new recruits into the business over H1 2023.

We believe the benefit we can drive from both new and existing strategic partnerships has significant headroom for further growth, which the Group continues to target.

Open source buying driving our exclusive wine range

Given the pressure on the cost of producing wine, which has been driven by the escalation in dry goods such as glass, packaging and freight, it has become more important than ever that the business is able to work with its large, long-standing network of winemakers and wineries all around the world to deliver the very best quality and value wines possible.

It has been the ability to leverage this vital part of our unique model that has allowed the margin expansion that has been delivered to the repeat sales channels whilst managing price increases to remain attractive and competitive. It has also allowed the business to manage inventory levels to maximise the breadth and range of our portfolio without holding unnecessarily high levels of stock or having large ongoing commitments.

Operations

Following a thorough review of the new Warehouse Management System, our teams have started to implement the necessary measures to resolve the issues experienced during the period. As a result, the Group is already seeing a return to more normal operations in H2, with over 97% of orders placed before 4pm being despatched the same day.

Whilst there is still work to do to deliver the operational costs we aim for, our initial focus has been on ensuring our customers receive the highest levels of service and quality possible. With that now in place, we will continue to drive the cost per case down, prove that the system is robust and delivers full stability while stress testing to prove the capability for operational efficiency at peak trading.    

Outlook

The consumer landscape remains challenging as customers continue to be prudent with their expenditure on discretionary purchases. We do not expect this trend to unwind in the near future, so we will continue to be disciplined with our marketing investment, focusing on low-cost recruitment and maximising value from the existing customer base.

We are confident that the one-off issues surrounding the WMS will continue to unwind over H2 and we can drive the business back to operational efficiency and with a platform in place that will allow significant future growth. Whilst we understand that there will continue to be pressure on revenue due to current levels of consumer confidence and on costs due to the inflationary climate, we believe that the core business model is robust, and the business can continue to trade resiliently in the short term and thrive in the longer term as the consumer landscape improves.

The business has traded broadly in line with expectations over January and February, continues to be profitable with consistently strong cash reserves and, as previously announced, the Board expects top-line performance in H2 to remain resilient. Full year revenue and profit will be impacted by the factors in H1 outlined above and, as a result, as previously announced, the Board expects revenue for FY23 to be around £63m, full year EBITDA margin to be between 4% and 5%, and EBITDA margin excluding exceptional factors to be 2% higher, in the range of 6-7%.

Business review

Given the shift in consumer confidence over the past 15 months, the macro challenges that we are facing, and the changes experienced across our trading environment versus that experienced during the Covid period, the business is currently undertaking a full business review to ensure we are fully leveraging the opportunities available to us and that we are positioned as positively as possible for future growth and profitability.

Whilst the Group has been open-minded about potential strategic opportunities to date, the quality of potential acquisitions available that could deliver incremental value has been mixed and the desire to look at international expansion is limited in the short to medium term. The business is therefore focussing resources on delivering growth opportunities in the domestic market, utilising its core competencies and infrastructure to drive performance over the coming three years.

Further work is being done in this area and we look forward to providing more detail on these plans later in H2 2023.

FINANCIAL REVIEW

Revenue

Group revenue of £33.6m reflected a reduction of 17% year-on-year (H1 2022: £40.6m). Revenue performance was impacted by the one-off issues referenced earlier in the report. WineBank revenue was the least impacted by these issues, down 10.8% year-on-year, and remains 65% higher than H1 2020. Revenue from new customer acquisition activity was unchanged year-on-year.

Gross profit

Gross profit margin fell to 29.1% (H1 2022: 31.1%). Packaging and delivery costs increased as a percentage of revenue by 0.8% year-on-year, as a result of the sharp increase in fuel and energy costs. The new structure of introductory case offers, including the use of 6 bottle offers rolled out in H2 FY2022, led to lower new business margins in H1 this year compared to H1 2022. Product margins excluding packaging and delivery for D2C activity increased to 41.1% (H1 2022: 40.4%). The index of dry goods costs (glass, packaging, labels etc) has increased by 66% from a base in October 2021. The ability of the business to configure cases has enabled it to offset a large part of these inflationary pressures.

Exceptional one-off expenses

Due to operational issues following the launch of the new WMS system, the business incurred additional one-off expenses relating to the requirement for extra temporary labour, third party IT support and additional storage costs of £616k (H1 2022: £0). These have been disclosed separately due to their scale and one-off nature.

EBITDA

Underlying EBITDA before the exceptional expenses highlighted above was £1.4m, down from £3.9m in H1 2022.

Profit before tax

Profit before tax was £0.1m (H1 2022: £3.2m).

Share based payments

The Group provided for a share-based payment expense of £89k (H1 2022: £177k) relating to the share based long-term incentive plan for the leadership team.

Finance income

Finance income of £52k (H1 2022: £0k) relates to bank interest earned on cash balances.

Finance expenses

Finance expenses of £89k (H1 2022: £70k) relates to the interest charge for Right of Use Assets. The Group has no borrowings so there are no expenses relating to servicing overdrafts or loans.

Earnings per share

Earnings per share decreased to 0.1p from 4.6p in H1 2022 due to the fall in operating profit.

Dividend

The Board is not recommending the payment of an interim dividend, but it will keep the Group's dividend policy under review.

Foreign currency

All group income is derived from UK activity and denominated in GBP. The Group purchases supplies, mainly wine, from the global market predominantly in Euros, US Dollars and Australian Dollars. The Group hedges its foreign currency purchases to provide clarity on future cost prices.

Inventory

As a result of the lower than planned sales volumes in H1, inventory levels increased by £2.4m from June 2022 to £11m. By slowing down replenishment activity in H2, inventory levels will drop back to the normal range by the end of FY2023.

Cash

The Group monitors net cash after deducting WineBank customer deposits. The cash in hand excluding WineBank deposits at 31 December 2022 was £7.6m, compared to £7.7m at the previous year end. The extra working capital invested in stock will reverse out during H2.

Jay Wright

Chief Executive Officer

14 March 2023

Condensed consolidated statement of comprehensive income

for the period ended 31 December 2022

Condensed consolidated statement of financial position

as at 31 December 2022

Condensed consolidated statement of changes in equity

for the period ended 31 December 2022

Condensed consolidated statement of cash flows

for the period ended 31 December 2022

(1)   Cash and cash equivalents include Group cash and Wine Bank customer deposits.

Notes to the interim financial information

for the period ended 31 December 2022