Description

Duckhorn Portfolio Inc ("NAPA")

Elevator Pitch

NAPA is cheap with a catalyst. Despite disappointing post-IPO performance as NAPA never lived up to its DTC hype, NAPA is an attractive wine asset trading at a double-digit FCF yield. In addition, NAPA is controlled by TSG, who is eight years into its investment and incentivized to explore a sale of the Company. Coupled with potential strategic acquirors and recent transaction comps for similar assets, I believe that NAPA could deliver a double in the next year to 12 months.

Background

The Duckhorn Portfolio Inc (“Duckhorn,” "NAPA" or the “Company”) produces luxury and ultra-luxury wines in CA and WA under the Duckhorn Vineyards, Decoy, Sonoma-Cutrer, Goldeneye, Paraduxx, Migration, Canvasback, Calera, Kosta Browne, Greenwing and Postmark brands.

Duckhorn was acquired by TSG Consumer (“TSG”) in 2016. Since then, the Company has nearly trebled EBITDA (on a pro forma basis) through organic growth of the eponymous Duckhorn and Decoy brands (which account for ~65% of PF Revenue) as well as two larger acquisitions (Kosta Browne in 2018 and Sonoma-Cutrer in May 2024).

The Company took advantage of COVID-induced demand for DTC-related equities by going public in March 2021 at $15 / share. At the IPO price, NAPA traded at ~20x ’21 Consensus EBITDA with analysts comparing it to “high-growth consumer companies” such as LULU, FRPT, SAM, MNST, etc and touting the ~20% of its revenue that is derived from DTC sales.

Since then, and despite outperforming most post-IPO analyst projections (2023 EBITDA of $145mm easily outpaced the ~$130mm 2023 Consensus from April 2021), NAPA is down ~ (55%) from its IPO price due to significant multiple contraction as topline growth has slowed and DTC sales are effectively flat. Despite some TSG secondary offerings at much higher prices, NAPA has a relatively limited public float (~$360mm currently) with TSG and Brown Forman (who owns just over 20% of the Company due to the Sonoma – Cutrer transaction). Simply put, the Duckhorn experiment in the public markets has failed.

Thesis / Why the Opportunity Exists

1. TSG and Management are Incentivized to monetize its NAPA stake via a sale of the Company

TSG made its Duckhorn investment out its 7A fund that closed in 2015. TSG 7A also included a wildly successful investment in Dutch Bros Coffee (“BROS”). At one point in early 2022, TSG 7A was marked at a 3.0x MOIC but has been subsequently marked down to as low as a 2.2x due largely to share price declines in NAPA and BROS as I believe those investments account for substantially all of the remaining fund value.

Even as BROS has declined from its highs, TSG has been aggressively selling down that position with three large secondary offerings in the last twelve months. I suspect that TSG wants to monetize the remaining NAPA and BROS positions as quickly as possible, get the 7A Fund closer to a ~2.5x MOIC, which would be a win from a fundraising / narrative perspective and move on vs having to explain to its LPs every quarter while what was once an absolute home run of a fund, is being marked down yet again.

If one subscribes to this logic, given TSG still owns >40% of NAPA coupled with its disappointing public market performance, the relatively limited options to change its public market perception in the near term, and fact that Duckhorn has value to a strategic acquirer well above where it currently trades, I believe TSG is highly likely to pursue a sale of the entire company in the next 12 months.

2. I believe NAPA offers substantial near-term upside in a sale scenario

Good wine assets trade at double-digit EBITDA multiples. There are few good wine assets that have the scale that Duckhorn does and think that someone like Treasury Wine Estates (“TWE”) would be chomping at the bit to acquire NAPA were it to be sold.

In a Base Case, I believe Duckhorn would sell for 12x EBITDA in a sale (before any synergies to a buyer). At this value a transaction would be immediately accretive to TWE and thus a potential win-win for TSG, TWE and shareholders. At 12x estimated EBITDA, NAPA offers a double to this outcome. It’s worth noting that NAPA’s new CEO, Deidre Mahlan (who was previously Chairwoman), has $1.5mm of restricted stock at $13 / share so believe this represents a good clue as to the bar that TSG is aiming to achieve in a sale. I also think that the fact that TSG ended up sticking with Mahlan vs going with an outside hire gives lends further in support of a sale outcome (i.e., stick a safe pair of hands to bridge to a sale vs rocking the boat).

3. In the event there is no sale, a NAPA investor is earning an ~11% FCF yield to wait, which is too cheap for this Company

Pro forma for the Sonoma-Cutrer transaction, I estimate NAPA is trading at an ~11% FCF yield at its current guidance (pro forma for Sonoma-Cutrer and inclusive of expected synergies). While I believe that a sale is the most likely outcome, as a downside, I would be happy to own NAPA at that yield particularly with its modest current leverage.

Risks

1. California concentration

Except for a small Walla Walla, WA presence, NAPA is effectively a California company with little geographic diversification. I think this presents some risk, particularly from a wildfire perspective.

2. TSG decides to hold

Given the public market performance and small float, should I be wrong in my belief that TSG is likely to pursue a sale of the Company, this could certainly be a dead money investment (albeit somewhat mitigated by the attractive cash flow yield).

Catalyst

Sale

FY 2025 FCF Guidance