Altria's Wine Business (Chateau Ste. Michelle) Isn't Doing Much Better than Scheid Vineyards ($SVIN $MO)

Nate did a post in June, "Interpreting the Scheid Vineyard 2019 Results". The trends that he noted in that post, and also in our post last summer about developing concerns with Scheid, have not really changed. We noted that the most recent quarter's results showed SG&A and interest expense that were 2.6x greater than gross profit.

In their Q2 2020 results, Altria mentioned that it was having challenges in its wine business, Chateau Ste. Michelle, which is something like the 9th largest U.S. winery.
Evolving adult consumer preferences have posed strategic challenges for Ste. Michelle, which has seen slowing growth in the wine category and increased inventory levels in recent periods. Against a backdrop of product volume demand uncertainty and long-term non-cancelable grape purchase commitments, which have been further negatively impacted by government actions which restrict direct-to-consumer sales and on-premise sales, and economic uncertainty surrounding the COVID-19 pandemic, Ste. Michelle experienced additional increases in inventory levels that at March 31, 2020 significantly exceeded long-term forecasted demand.

During the six and three months ended June 30, 2020, Ste. Michelle recorded pre-tax charges of $394 million and $2 million, respectively, which were included in cost of sales in Altria’s condensed consolidated statement of earnings. The charges consisted of the following: (i) write-off of inventory ($292 million recorded in the first quarter of 2020) as Ste. Michelle no longer believes that the benefit of the blending and production plans for its inventory outweighs inventory carrying cost given the reduced product volume demand; (ii) estimated losses on future non-cancelable grape purchase commitments that Ste. Michelle believes no longer have a future economic benefit ($100 million recorded in the first quarter of 2020); and (iii) inventory disposal costs and other charges ($2 million recorded in the second quarter of 2020). The non-cancelable grape purchase commitments will continue to require cash payments as grape commitments are fulfilled over the next five years.

Given such uncertainty in economic conditions and product volume demand, as well as long-term supply-side contractual challenges, Altria and Ste. Michelle undertook a review of the wine business. As a result, Altria and Ste. Michelle implemented a strategic reset in order to maximize Ste. Michelle’s profitability and achieve improved long-term cash-flow generation. This strategic reset includes: (i) an updated approach to forecasting demand; (ii) supply chain optimization; (iii) SKU rationalization to reduce the number of products and eliminate underperforming brands; and (iv) streamlining operations by reducing future capital expenditures, working capital requirements and ongoing operating costs.
As of May 31, 2020, Scheid had $51 million of wine inventory out of a total of $156 million of assets. It seems like a bad sign if anyone is having trouble selling alcoholic beverages right now. Alcohol sales are way up during quarantine.

While on-premises sales have collapsed, estimates are that off-premises have risen enough to make up for this. So if a company can't sell booze right now, they should probably be worried.

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