If you missed out on the pandemic-driven share price gains at Naked Wines (WINE:AIM) fear not, for another listed online wine retailer offers a tasty proposition and fruitful growth prospects.

Open a position in Virgin Wines (VINO:AIM) at 224p, where the stock market newcomer trades at a steep discount to online peers.

Based on estimates for the year to June 2022, Virgin Wines trades on 19.1 times forward earnings, considerably less than many other online-focused companies on the UK stock market.

For example, fashion retailer ASOS (ASC:AIM) trades on 33 times forward earnings and sector peer Boohoo (BOO:AIM) trades on almost 32 times. Online musical instruments retailer Gear4Music (GFM:AIM) trades on 38 times forward earnings.

Virgin Wines is cash generative and profitable, whereas rival Naked Wines is forecast to remain loss-making as it invests heavily to acquire customers and build stock levels.

THIRSTY CUSTOMERS

A lot of people ordered wine via the internet during the pandemic as they couldn’t get out to bars, pubs and restaurants, benefiting the likes of Virgin Wines. While the sector is now lapping tough comparative sales figures, investors should look at the longer-term prospects rather than focus on whether 2020’s big growth spike can be repeated.

Virgin Wines offers exposure to direct-to-consumer digital growth, driven by increased investment in new customers and underpinned by predictable subscription revenues.

The near-term outlook for consumer spending is positive and Virgin Wines’ exposure to trends including premiumisation in the alcoholic drinks market, the shift to online and the growth of subscription models mean outer year earnings forecasts could prove conservative.

PREMIUM FOCUS

AIM-traded Virgin Wines is one of the UK’s largest direct-to-consumer online wine retailers and the exclusive licensee of the Virgin Wines brand in the UK and Ireland from Virgin Enterprises, an arm of Richard Branson’s Virgin empire.

Firmly focused on the premium wine market, the company has a reputation for supplying high-quality wines curated to customers’ tastes and good customer service.

The company has been profitable in every year since Jay Wright’s appointment as CEO in 2008. It is highly cash generative, and it is benefiting from the structural shift in how people buy more through digital channels. The pandemic has further entrenched delivery as a more viable and convenient option for wine drinkers.

UNCORKING THE POTENTIAL

Liberum Capital says the group has ‘a more disciplined and targeted approach to growth’ than rival Naked Wines, offering more choice in terms of its subscription schemes.

Its wine clubs include something called WineBank whereby a customer deposits a set amount of money into their account each month and then buys wine when they are ready. For every £5 a customer saves into their account, Virgin Wines gives them £1 extra to spend on wine.

Liberum says: ‘Stability of management and track record, consistent delivery of profits, stronger sales retention and paybacks, better cash flow generation from high stock turn and much higher margin structure all point to Virgin Wines scoring as the premium investment case on offer.’

Virgin Wines’ business model is ideally suited for a digital age; it uses a wealth of customer data and an open source buying model which ensures the company can source the best product at the best prices while also creating a range of wines suited for the tastes and stylistic preferences of its customers. By selling exclusive products, Virgin Wines maintains premium prices and benefits from minimal returns.

TASTY OPPORTUNITY

Management estimates the current UK addressable retail wine market, defined as households who buy more than three bottles of wine per month with price points of over £6 per bottle, is around £2.4 billion.

Around £780 million of that figure is through direct-to-consumer online retail channels, with Virgin Wines speaking for just 9%, so there is still a big growth opportunity.

Furthermore, the market for wine specialists is expected to grow by circa 3% per year with the online segment growing by roughly 11% to 12% per year from 2021 to 2025.

Growing its craft beers and spirits range, Virgin Wines also sees opportunities to expand in overseas territories such as the US, Europe and Australia over the long term.

SALES PROFILE

Virgin Wines generated 33% sales growth to £56.5 million in the year to June 2020, and then reported £40.6 million sales in the first half of its current financial year. Liberum is looking for £70.3 million sales for the full year, which implies second-half sales of £29.7 million.

While that second-half figure would be slightly lower than the £30.3 million recorded in the same period in 2020, Liberum believes its estimates are ‘prudent considering the positive momentum across unit economics and key performance indicators’.

For fiscal 2021, it forecasts £4.6 million pre-tax profit (2020: £2.8 million), rising to £6.5 million in 2022 and £8.1 million in 2023.

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