Treasury Wine Estates profit soars on higher luxury wine sales, hikes dividend

Treasury Wine Estates’ earnings soar as luxury wine sales gain, but missed sales and profit targets drives its share price 7 per cent lower.

Treasury Wine Estates boss Tim Ford strongly defended the quality of the winemaker’s results and earnings momentum on Wednesday but his arguments fell on deaf ears as the market heavily sold down the stock fearing a slowdown in the US and waning enthusiasm for its juggernaut 19 Crimes label.

Analysts also pointed to disappointing volumes for wine sales below $US15 a bottle in the Americas and worse than expected cashflows, which suggested an unwanted build up of unsold wine stuck in warehouses, and that helped generate first half group sales and profit for the winemaker that badly missed market expectations.

The slow down - especially at the cheaper end of Treasury Wine’s global wine portfolio - was particularly marked in the December quarter where its popular 19 Crimes wine fronted by US rapper Snoop Dogg is showing signs of finally weakening after initial blockbuster success that saw it race to a 5m cases a year label since launch.

Shares in Treasury Wine fell more than 7 per cent on the December half results, despite revenue gaining 1.4 per cent to $1.284bn, profit up 72.5 per cent to $188.2m and the dividend hiked up 16.7 per cent. The stock later closed down 99c, or 6.9 per cent, at $13.34. It declared an interim dividend of 18c per share, up from 15c, payable on April 4.

Luxury wine sales, like its Penfolds range, performed well over the six-months to December 31.

The winemaker, whose brands include the iconic luxury wine Penfolds and Wolf Blass, said it remained on track to deliver strong earnings growth and earnings margin expansion in 2023, with trading conditions for the remainder of the year expected to remain broadly consistent with those in the first half.

Mr Ford said despite economic headwinds sales of Treasury Wine’s portfolio of wines priced above $30 a bottle - tagged as premium and luxury - consumers were still spending up and this category had held up its resilience.

But wines priced below around $15 a bottle were showing the strains of inflationary pressures and squeezed household budgets as well as changing consumer tastes.

“With the below $10 wines where we have seen the majority of the decline around the globe, it is the whole category and I don’t think just an economic or environment change I think it is consumers are buying less and they are buying better,” Mr Ford said.

“I think there is also a structural change with wine below $10 a bottle around the globe which I would expect to continue to decline even once we are through this interest rate cycle and cost of living difficulties that are being created particularly for low income earners.”

But this was also hurting Treasury Wine’s blockbuster 19 Crimes label in the lead up to Christmas to push some analysts to speculate the label might have peaked and was now on the decline.

Mr Ford admitted Treasury Wine needed to work on its marketing strategies for 19 Crimes in the US following the disappointing half.

“19 Crimes we see as a growth engine for us for years to come. It is slowing down off the rate of sales of the core 19 Crimes, as we call it, which is the Australian portfolio that has been big in the market for a decade. And that’s because we haven’t innovated for the last six to 12 months as much as we needed to.

“Our execution needs to improve and it will.”

Analysts also raised the issue of Treasury Wine’s poorer cashflows and cash conversion in the half, with cash conversion at 67.7 per cent against a historic benchmark of 90 per cent which suggested a costly build up of inventory of unsold wine.

Mr Ford was adamant that Treasury Wine didn’t have an inventory problem, with wine correctly allocated for sale over the next 12 months and beyond that.

Meanwhile, its flagship Penfolds division reported a 7.2 per cent lift in sales to $410.2m as earnings rose 10 per cent increase in earnings to $181.6m.

“Our luxury wine portfolios in particular continue to perform exceptionally well across all markets and channels, and the fundamentals of the category are expected to remain strong at these higher price points,” said Mr Ford.

Treasury Americas reported a 35.2 per cent increase in earnings to $115.2m as sales lifted 4.1 per cent driven by favourable foreign exchange rates and supported by the performance of key luxury portfolio brands including Frank Family Vineyards and Beaulieu Vineyard.

Its Treasury Premium Brands wine portfolio reported a 15.4 per cent lift in earnings to $45m and sales down 7 per cent, reflecting unfavourable foreign exchange rates and cheaper commercial portfolio volume declines in the UK and Australia.

Originally published as Treasury Wine Estates profit soars on higher luxury wine sales, hikes dividend