Truett-Hurst, Inc. (NASDAQ: THST) is a holding company, and its sole asset is the controlling equity interest in H.D.D. LLC, an innovative super-premium, ultra-premium and luxury wine sales, marketing and production company based in the acclaimed Dry Creek Valley of Sonoma County, California. Truett-Hurst, Inc. is headquartered in Healdsburg, California.
The company was recently featured in the most active list and its shares skyrocketed with incredibly strong volumes after it announced that its sold it wholesale wine business to Precept Brands for about $18M in cash.
As per the announcement on August 13th, the transaction is expected to result in proceeds of approximately $15.9 million for the Company, and after payment of bank debt and certain transaction expenses, the Company expects to have approximately $5.6 million of cash.
Truett-Hurst’s wholesale wine business consists of the Company’s wholesale bottled wine inventory, brands, supplies and bulk wine inventory used for the Company’s “control label” wine brands and related intellectual property. These wholesale brands are produced under a variety of labels and sold primarily to national retail chains. The Company will retain its Direct to Consumer business and Dry Creek Valley Estate in Healdsburg, California.
Expected synergies from the deal:
- Operational synergy: With the aforesaid agreement, the company has entered into a very sweet spot, as the sale of wholesale wine business will allow it to focus all of its resources on its principal core brands of “Truett Hurst” and “VML” which are primarily sold at the Truett Hurst Winery in Healdsburg, to Wine Club members via direct shipments and to select retailers around the country.
- Financial synergy: The Company expects to use the proceeds from the sale of the wholesale wine business to eliminate indebtedness and to invest in its direct to consumer business. The Company will also consider using a portion of the purchase price to provide returns to the Company’s public stockholders.
Prior to this, on May 15th the company announced financial report for March 31st, 2018, For the nine months ended March 31, 2018, net sales increased $1.5 million or 9%; however, consolidated gross profit decreased slightly from 34.7% to 33.6% compared to the same period during the prior year. Net sales for the nine months ended March 31, 2018, increased over the previous year despite the falloff from a significant customer that is undergoing a substantial change in distribution tactics.
The fundamental situation for THST is rapidly improving, with the recently announced deals, we now have the new key drivers behind this stock that could make it go higher from here. Also, the deal is likely to provide operational and financial leverage, which promises improved yields and financial flexibility. Analysts tracking the stock believes that the company is available cheaply given the growth that’s reflecting on the chart.
Key premium brands:
Critical Strategic objectives and unique differentiating factors:
Developing innovative retail exclusive products that meet the needs of wine retailers. The Company has a reputation for developing innovative retail exclusive brands and working with retailer partners on unique programs to support sales of those products. With branding expertise, the Company intends to continue innovation and build its market share with global wine retailers who are focused on increasing their profitability through retail exclusive offerings.
- Growing the customer base to include additional major U.S. retail chains. The Company is actively pursuing relationships with the largest retail chains in the United States.
- Expanding the direct to consumer business. The wine clubs continue to grow due to growing consumer awareness of the brands from targeted public relations, exciting wine club events, and advertising. The direct to consumer business generally generates relatively higher gross margins.
- Marketing to key international markets. During FY14, the Company completed an agreement with the Trialto Wine Group, LTD, based in Vancouver, Canada, creating a national partnership to distribute the Truett-Hurst family of brands throughout Canada. The Company also continues to review selective brand development and distribution opportunities in other international markets.
- Developing new ways to engage customers and to distribute products. The Company believes that traditional wine marketing, to some degree, has stymied creativity and believes the innovative branding expertise allows the Company to capitalize on evolving customer demands rapidly.
Latest Quarter Financial position:
THST has a FYE of June 30th.
Revenue and yields: For the three months ended March 31, 2018, net sales increased $1.2 million or 22%, and consolidated gross profit margin decreased from 37.9% to 35.4%, compared to the same period during the prior year. For the nine months ended March 31, 2018, net sales increased $1.5 million or 9%; however, consolidated gross profit decreased slightly from 34.7% to 33.6% compared to the same period during the prior year. The decrease in gross profit during the quarter and nine months ended March 31, 2018, was primarily due to an increase in the cost of sales attributable to higher case sales, and an increase in discounts which contributed to lower net sales. Also contributing to the lower gross profit during the nine months ended March 31, 2018, is an increase in inventory reserves and write-offs.
Liquidity: The Company had approximately $1.0 million of availability under its revolving credit facility as of March 31, 2018, compared to $3.0 million as of June 30, 2017. During the third quarter of the fiscal year 2018, the Company’s average borrowings outstanding under its revolving credit facility were $8.8 million compared to average borrowings of $4.2 million in the prior year.
Key risk factors and potential stock drivers:
- Notwithstanding, management’s focus on deleveraging its balance sheet, the company continues to face challenges with its liquidity. Therefore, the terms of the Company’s current bank loans may restrict existing and future operations, which might adversely affect the Company’s ability to respond to changes in its business and to manage its operations.
- The company’ business risk profile would continue to remain constrained due to the intense competition and regulated nature of the industry which could restrict its growth and margins to a certain extent.
- The stock performance can improve significantly if substantial growth in revenue and profitability strengthen the financial risk profile and overall debt metrics of the company.
- Premiumization is expected to support revenue growth going forward – Changing consumer preferences towards premium brands in conjunction with continued marketing efforts being made by the company is expected to support long-term revenue growth of the company.
- On Wednesday, August 15th, 2018, THST shares were at $1.74 on traded volume of 303K shares exchanging hands. Market capitalization is $8.7 million. The current RSI is trending at 58.73
- In the past 52 weeks, shares of THST have traded as low as $1.26 and as high as $3.19
- At $1.74, shares of THST are trading above its 50-day moving average (MA) at $1.50 and below its 200-day moving average (MA) at $1.78
- The present support and resistance levels for the stock are at $1.07 & $2.80 respectively.
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