Has the fizz gone out of Chapel Down?

The honeymoon period for AIM-listed Chapel Down is officially over.

After moving to the London Stock Exchange sub-market from AQSE in December, shares saw a steady rise, peaking up 45% to 80p in early July. Since then, however, everything has gone flat for England’s leading sparkling winemaker.

Shares had already fallen by 13% by early September, before a dismal set of half-year results. Those figures and the news its CEO Andrew Carter would next year depart to brewer Timothy Taylor’s caused a further 17% crash. With its share price now hovering at around 52p – 30% down from its summer peak and near-flat on the price at which it was admitted to AIM in December – Chapel Down investors certainly won’t be popping corks in celebration any time soon.

So, what’s gone wrong, and how worried should management and investors be?

Surprising sales slump

Chapel Down’s first-half results made for grim reading. After sales topped £18m in 2023, the winemaker said in July it was on track to grow revenues by double digits again this year. With the reveal sales had slid 11%, to £7.1m in the six months to the end of June, that’s been downgraded to single digits, a prediction that will still require a herculean turnaround in the second half of the year.

Chief culprit in the tumble was the off-trade channel, where bottles of fizz piled up after Chapel Down’s refusal to take part in pre-Christmas price wars, Carter says. “We took the decision that we didn’t want to drop any deeper on our promotional pricing, so we came into January carrying more stock than expected.”

This carryover, coupled with “a general softening of rate of sale” and the lapping of last year’s coronation – where Carter says Chapel Down shifted “20,000 bottles of sparkling wine in a very small period of time” – meant off-trade sales slumped by 36%, to £3.1m.

P&L knock-on

The knock-on impact has been felt throughout Chapel Down’s P&L, with gross profit, operating profit and profits before tax falling by 22%, 91% and 98% respectively.

It’s clearly spooked investors, but Chapel Down remains “the only profitable English wine company”, Carter points out. “Our shareholders are buying into the brand on a five to 10-year growth opportunity.”

CFO Rob Smith, meanwhile, highlights that several non-cash accounting adjustments – including fair value movement in biological produce – were at play in the near-total collapse of profits before tax, a figure he says has “a lot of noise about it”.

“The two big elements of [gross profits falling] were gross margin, which we warned about, and the fair value adjustment of our grapes, which we knew about as well,” he adds.

Investment needs

Despite the crash in profitability, there’s no suggestion Chapel Down intends to cut back on marketing and other investment to reassure shareholders. Promotional activity in the off-trade will be upweighted in the second half of the year, and Carter insists marketing spend will be maintained to ensure Chapel Down keeps up with its competitors. “To continue to invest behind driving awareness and penetration is absolutely everything,” he says.

He’s also mindful of Chapel Down’s inventory, currently sitting at £21.8m in value after a record harvest in 2023, and likely to swell further as vineyards planted in recent years come to fruition.

“We’ve got the highest acreage of vineyard [in England] and so we’ve got more and more sparkling wine bottles that will become available. Therefore, we’ve got to keep investing.”

Funding review ‘catalyst’

The need to fund investment was behind both Chapel Down’s decision to list on AIM in December last year, and a strategic funding review announced in June, according to Smith.

The listing has given Chapel Down greater “optionality”, while the funding review – which may yet result in the sale of the business – is needed as it prepares to move to a new winery in Canterbury, he says. “It was the imminent planning approval which was the catalyst for saying: now we need to understand the funding mix.”

Chapel Down announcing it needed more cash so soon after listing on AIM is not wholly unsurprising given the costly nature of winemaking, explains Russ Mould, investment director at AJ Bell. “Given its acreage, the inventory on hand and the capital intensity of the business, they’re facing the prospect of relatively regular fundraising through debt or equity, or one major change in structure, which is to find a buyer.”

Any would-be buyer will be “very cognisant of the challenges a business like that faces”, Mould says. “It’s got substantial growth prospects but it needs substantial amounts of cash to fund them.” This makes a sale to a drinks industry peer over private equity a more likely outcome, he adds.

Carter’s legacy

The timing of Carter’s departure after such a poor set of results could also raise eyebrows. The former Treasury Wine Estates and Chase Distillery boss insists the decision to move on was a personal one, however.

“There’s never a good time to announce these changes,” Carter says, adding he remains “very focused and involved” in completing the business’ funding review before his exit in the first half of 2025.

The legacy Carter leaves behind is likely to depend both on the outcome of that review, and the strength of any turnaround seen at Chapel Down over the next six months.