10-Q 1 napa-20240430.htm 10-Q napa-20240430
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2024

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-40240
TDP_Logo_2-21.jpg
The Duckhorn Portfolio, Inc.
(Exact name of registrant as specified in its charter)
Delaware
81-3866305
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1201 Dowdell Lane Saint Helena, CA 94574
(Address of principal executive offices)
(707) 302-2658
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of classTrading SymbolName of exchange on which registered
Common Stock, par value $0.01 per shareNAPANew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒    No  ☐ 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒   No  ☐ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer
Accelerated
filer
Non-accelerated filer  
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   ☐   No  
The registrant had outstanding 147,052,392 shares of common stock, $0.01 par value per share, as of May 30, 2024.



Table of Contents




Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q and other materials filed or to be filed by us with the U.S. Securities and Exchange Commission (“SEC”) contains statements that are or may be considered to be, forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, the following:
•    our ability to manage the growth of our business;
•    our reliance on our brand name, reputation and product quality;
•    the effectiveness of our marketing and advertising programs, including the consumer reception of the launch and expansion of our product offerings;
•    general competitive conditions, including actions our competitors may take to grow their businesses;
•    overall decline in the health of the economy, consumer discretionary spending and consumer demand for wine;
•    the occurrence of severe weather events (including fires, floods and earthquakes), catastrophic health events, natural or man-made disasters, social and political conditions or civil unrest;
•    risks associated with disruptions in our supply chain for grapes and raw and processed materials, including barrels, glass bottles, cork, winemaking additives and agents, water and other supplies;
•    disrupted or delayed service by the distributors and government agencies we rely on for the distribution of our wines outside of California;
•    our ability to successfully execute our growth strategy;
•    risks associated with our acquisition of Sonoma-Cutrer Vineyards, Inc., a California corporation (“Sonoma-Cutrer”);
•    decreases in our wine score ratings by wine rating organizations;
•    quarterly and seasonal fluctuations in our operating results;
•    our success in retaining or recruiting, or changes required in, our officers, key employees or directors;
•    our ability to protect our trademarks and other intellectual property rights, including our brand and reputation;
•    our ability to comply with laws and regulations affecting our business, including those relating to the manufacture, sale and distribution of wine;
•    the risks associated with the legislative, judicial, accounting, regulatory, political and economic risks and conditions specific to both domestic and to international markets;
•    claims, demands and lawsuits to which we are, and may in the future, be subject and the risk that our insurance or indemnities coverage may not be sufficient;
•    our ability to operate, update or implement our information technology systems;
•    our ability to successfully pursue strategic acquisitions and integrate acquired businesses;
•    our potential ability to obtain additional financing when and if needed;
•    our substantial indebtedness and our ability to maintain compliance with restrictive covenants in the documents governing such indebtedness;
•    our largest shareholders’ significant influence over us;
•    the potential liquidity and trading of our securities; and
•    the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and
3

projections about future events, and trends that we believe may affect our business, results of operations and financial condition. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” in Part 1 Item 1A. in our Fiscal 2023 Annual Report on Form 10-K and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a highly competitive environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements whether as a result of new information, future developments or otherwise. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not rely on our forward-looking statements in making your investment decision. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
Investors and others should note that we may announce material information to our investors using our investor relations website (https://ir.duckhorn.com), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our Company, our business and other issues. It is possible that the information we post on social media could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.
4

PART I
Item 1. Financial Statements

Index to Condensed Consolidated Financial Statements
Page


5

The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Financial Position
(Unaudited, in thousands except share and per share data)
April 30, 2024July 31, 2023
ASSETS
Current assets:
Cash$15,735 $6,353 
Accounts receivable trade, net44,893 48,706 
Inventories454,921 322,227 
Prepaid expenses and other current assets6,445 10,244 
Total current assets521,994 387,530 
Property and equipment, net565,806 323,530 
Operating lease right-of-use assets17,189 20,376 
Intangible assets, net195,557 184,227 
Goodwill483,818 425,209 
Other assets9,100 6,810 
Total assets$1,793,464 $1,347,682 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$5,344 $4,829 
Accrued expenses30,915 38,246 
Accrued compensation10,802 16,460 
Current maturities of long-term debt9,721 9,721 
Due to related party (Note 13)1,730  
Other current liabilities5,990 5,204 
Total current liabilities64,502 74,460 
Revolving line of credit102,000 13,000 
Long-term debt, net of current maturities and debt issuance costs203,206 210,619 
Operating lease liabilities13,398 16,534 
Deferred income taxes151,175 90,216 
Other liabilities647 445 
Total liabilities534,928 405,274 
Commitments and Contingencies (Note 12)
Stockholders’ equity:
Common stock, $0.01 par value; 500,000,000 shares authorized; 147,048,822 and 115,316,308 issued and outstanding at April 30, 2024 and July 31, 2023, respectively
1,470 1,153 
Additional paid-in capital1,008,643 737,557 
Retained earnings247,839 203,122 
Total The Duckhorn Portfolio, Inc. stockholders’ equity1,257,952 941,832 
Non-controlling interest584 576 
Total stockholders’ equity1,258,536 942,408 
Total liabilities and stockholders’ equity$1,793,464 $1,347,682 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
6

The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands except share and per share data)
Three months ended April 30,Nine months ended April 30,
2024202320242023
Net sales (net of excise taxes of $1,114, $1,126, $3,915 and $4,179, respectively)
$92,532 $91,242 $298,086 $302,901 
Cost of sales41,089 40,731 134,472 142,494 
Gross profit51,443 50,511 163,614 160,407 
Selling, general and administrative expenses29,739 23,989 89,469 79,307 
Income from operations21,704 26,522 74,145 81,100 
Interest expense4,531 2,993 13,035 7,839 
Other (income) expense, net(3,054)729 (2,171)3,385 
Total other expenses, net1,477 3,722 10,864 11,224 
Income before income taxes20,227 22,800 63,281 69,876 
Income tax expense6,906 6,006 18,556 18,358 
Net income13,321 16,794 44,725 51,518 
Net loss (income) attributable to non-controlling interest2 3 (8)11 
Net income attributable to The Duckhorn Portfolio, Inc.$13,323 $16,797 $44,717 $51,529 
Earnings per share of common stock:
Basic$0.12 $0.15 $0.39 $0.45 
Diluted$0.12 $0.15 $0.39 $0.45 
Weighted average shares of common stock outstanding:
Basic115,804,326 115,255,671 115,504,766 115,209,972 
Diluted115,834,119 115,367,455 115,627,182 115,425,034 




















The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
7

The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited, in thousands except share data)
Three months ended April 30,
Common stockAdditional
paid-in capital
Retained
earnings
Total
The Duckhorn Portfolio, Inc. stockholders’ equity
Non-controlling interest
Total stockholders’ equity
SharesAmount
Balances at January 31, 2024115,409,107 $1,154 $740,548 $234,516 $976,218 $586 $976,804 
Net income (loss)— — — 13,323 13,323 (2)13,321 
Shares issued at acquisition, net of issuance costs31,531,532 315 266,639 — 266,954 — 266,954 
Issuance of common stock under equity incentive plans140,025 1 (1)—  —  
Equity-based compensation (Note 14)— — 1,746 — 1,746 — 1,746 
Shares withheld related to net share settlement(31,842)— (289)— (289)— (289)
Balances at April 30, 2024147,048,822 $1,470 $1,008,643 $247,839 $1,257,952 $584 $1,258,536 
Balances at January 31, 2023115,219,396 $1,152 $734,763 $168,556 $904,471 $580 $905,051 
Net income (loss)— — — 16,797 16,797 (3)16,794 
Issuance of common stock under equity incentive plans116,474 1 — — 1 — 1 
Equity-based compensation (Note 14)— — 1,756 — 1,756 — 1,756 
Shares withheld related to net share settlement(42,090)— (648)— (648)— (648)
Balances at April 30, 2023115,293,780 $1,153 $735,871 $185,353 $922,377 $577 $922,954 


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
8


The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited, in thousands except share data)
Nine months ended April 30,
Common stockAdditional
paid-in capital
Retained
earnings
Total
The Duckhorn Portfolio, Inc. stockholders’ equity
Non-controlling interest
Total stockholders’ equity
SharesAmount
Balances at July 31, 2023115,316,308 $1,153 $737,557 $203,122 $941,832 $576 $942,408 
Net income— — — 44,717 44,717 8 44,725 
Shares issued at acquisition, net of issuance costs31,531,532 315 266,639 — 266,954 — 266,954 
Issuance of common stock under equity incentive plans246,656 2 (2)—  —  
Equity-based compensation (Note 14)— — 4,960 — 4,960 — 4,960 
Shares withheld related to net share settlement(60,079)— (630)— (630)— (630)
Issuance of employee stock purchase plan14,405 — 119 — 119 — 119 
Balances at April 30, 2024147,048,822 $1,470 $1,008,643 $247,839 $1,257,952 $584 $1,258,536 
Balances at July 31, 2022115,184,161 $1,152 $731,597 $133,824 $866,573 $588 $867,161 
Net income (loss)— — — 51,529 51,529 (11)51,518 
Issuance of common stock under equity incentive plans138,839 1 — — 1 — 1 
Equity-based compensation (Note 14)— — 4,741 — 4,741 — 4,741 
Shares withheld related to net share settlement(42,090)— (648)— (648)— (648)
Issuance of employee stock purchase plan12,870 — 181 — 181 — 181 
Balances at April 30, 2023115,293,780 $1,153 $735,871 $185,353 $922,377 $577 $922,954 








The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
9

The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Nine months ended April 30,
20242023
Cash flows from operating activities
Net income$44,725 $51,518 
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization26,698 20,528 
(Gain) loss on disposal of assets(19)75 
Change in fair value of derivatives(1,717)2,943 
Amortization of debt issuance costs582 774 
Equity-based compensation4,960 4,741 
Change in operating assets and liabilities; net of acquisition (Note 4):
Accounts receivable trade, net3,813 (6,248)
Inventories(68,694)(39,278)
Prepaid expenses and other current assets4,101 1,633 
Other assets(753)(508)
Accounts payable(743)(352)
Accrued expenses(5,642)3,681 
Accrued compensation(5,934)(831)
Deferred revenue1,008 12,884 
Other current and non-current liabilities(2,794)193 
Net cash (used in) provided by operating activities(409)51,753 
Cash flows from investing activities
Purchases of property and equipment, net of sales proceeds(21,466)(14,111)
Acquisition of business, net of cash acquired(49,614) 
Net cash used in investing activities(71,080)(14,111)
Cash flows from financing activities
Payments under line of credit(29,000)(119,000)
Borrowings under line of credit118,000 9,000 
Issuance of long-term debt 225,833 
Payments of long-term debt(7,500)(117,666)
Proceeds from employee stock purchase plan119181 
Taxes paid related to net share settlement of equity awards(630)(648)
Payment of equity issuance costs(118) 
Payments for debt issuance costs (2,432)
Net cash provided by (used in) financing activities80,871 (4,732)
Net increase in cash9,382 32,910 
Cash - Beginning of period6,353 3,167 
Cash - End of period$15,735 $36,077 
Supplemental cash flow information
Interest paid, net of amount capitalized$12,944 $4,421 
Income taxes paid$28,053 $10,921 
Non-cash investing and financing activities
Property and equipment additions in accounts payable and accrued expenses$400 $332 
Consideration payable for the acquisition of Sonoma-Cutrer in accrued expenses
$778 $ 
Value of shares issued related to the acquisition of Sonoma-Cutrer$267,072 $ 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
10


The Duckhorn Portfolio, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)


1.    Description of Business
The Duckhorn Portfolio, Inc. and its subsidiaries (collectively, “the Company,” “Management,” “we,” “us,” “our” and “Duckhorn”), headquartered in St. Helena, California, produce luxury and ultra-luxury wine across a portfolio of winery brands, including Duckhorn Vineyards, Decoy, Sonoma-Cutrer, Goldeneye, Paraduxx, Migration, Canvasback, Calera, Kosta Browne, Greenwing and Postmark.
The Company’s revenue is comprised of sales to distributors and direct to trade accounts in California (“wholesale”) and direct to consumer (“DTC”). Wholesale revenue is generated through sales to distributors and directly to retailers and restaurants in California, sales to distributors and agents located in other states throughout the United States (“U.S.”) and sales to export distributors that sell internationally. DTC revenue results from individual consumers purchasing wine directly from the Company through club membership, the Company’s website or tasting rooms located in Napa Valley, California; Anderson Valley, California; Sebastopol, California; Hollister, California; Windsor, California; and Walla Walla, Washington.
The Company owns or controls, through long-term leases, certain high-quality vineyards throughout Northern and Central California and Washington. Vinification takes place at wineries owned, leased or under contract with third parties predominately located in Napa Valley, California; Anderson Valley, California; Hopland, California; Hollister, California; San Luis Obispo, California; Sebastopol, California; Windsor, California; and Walla Walla, Washington.
Fiscal year
The Companys fiscal year ends on July 31. Unless otherwise stated, references to particular years or quarters refer to the Company’s fiscal years and the associated periods in those fiscal years. Except as otherwise specified, information in this report is provided as of April 30, 2024.

Issuance of common stock
On April 30, 2024, the Company issued 31,531,532 common shares at a par value of $0.01 to Brown-Forman Corporation (“Brown-Forman”) as equity consideration for the acquisition of Sonoma-Cutrer which represents an ownership percentage of approximately 21.4% of the Company. See Note 4 (Business Combination) for additional information.
Secondary offering
In April 2023, the Company completed a secondary offering where certain existing stockholders sold 6,000,000 shares of common stock at a price of $15.35 per share. The Company did not receive any of the proceeds from the sale of the shares by the existing stockholders. In connection with the offering, the Company incurred costs of $0.4 million during the three and nine months ended April 30, 2023, which are reflected in selling, general and administrative expenses on the Condensed Consolidated Statement of Operations.
2.    Basis of Presentation and Recent Accounting Pronouncements
Basis of presentation
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and Article 10 of the Securities and Exchange Commission’s Regulation S-X. These Condensed Consolidated Financial Statements have been prepared on the same basis as the Companys audited annual financial statements and, in the opinion of Management, reflect all adjustments, consisting only of normal, recurring adjustments, which are necessary for the fair statement of the Companys financial information for the interim periods presented. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending July 31, 2024, for any other interim period or for any future year.
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The Condensed Consolidated Statement of Financial Position as of July 31, 2023 was derived from the Companys audited financial statements for the fiscal year ended July 31, 2023, previously filed with the SEC. The Condensed Consolidated Financial Statements do not include all of the information and note disclosures required by U.S. GAAP and should be read in conjunction with the audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2023.
Principles of consolidation
The Condensed Consolidated Financial Statements include the accounts of The Duckhorn Portfolio, Inc. and its subsidiaries, including a consolidated variable interest entity (“VIE”) of which the Company has determined it is the primary beneficiary. All intercompany balances and transactions are eliminated in consolidation.
Accounting estimates
The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Operating segment
The Company has one operating segment and one reportable segment. The Company’s Chief Operating Decision Maker reviews operating performance and makes decisions to allocate resources at the consolidated company level.
Preferred stock
The Company has 100,000,000 shares of $0.01 par value preferred stock authorized, none of which are issued and outstanding.
Variable interest entities
The Company evaluates its ownership, contractual relationships and other interests in entities to determine the nature and extent of the interests, whether such interests are variable interests and whether the entities are VIEs in accordance with Accounting Standards Codification (“ASC”) Topic 810, Consolidations. These evaluations can be complex and involve Management judgment as well as the use of estimates and assumptions based on available historical information, among other factors. Thus, it represents a Level 3 measurement as defined in ASC Topic 820, Fair Value Measurement. Based on these evaluations, if the Company determines that it is the primary beneficiary of a VIE, the entity is consolidated into the financial statements. At April 30, 2024 and July 31, 2023, the Companys ownership percentage of the sole identified VIE was 76.2%. The total net assets of the VIE included on the Condensed Consolidated Statements of Financial Position were $2.3 million as of April 30, 2024 and July 31, 2023. The assets and liabilities, which may only be used to settle its own obligations, are primarily related to property, equipment and working capital accounts, which generally represent the amounts owed by or to the Company for grape sales under current contracts and farming costs.
Business Combination
On April 30, 2024, the Company completed the acquisition of Sonoma-Cutrer. See Note 4 (Business Combination) for additional information. The acquisition was accounted for using the acquisition method of accounting prescribed by ASC Topic 805, Business Combinations, whereby the results of operations, including the revenues and earnings of Sonoma-Cutrer, are included in the financial statements from the date of acquisition. Assets acquired and liabilities assumed as of the date of acquisition are recognized at their fair values based on widely accepted valuation techniques in accordance with ASC Topic 820, Fair Value Measurements. Goodwill is recognized for the excess of the consideration transferred over the net fair values of assets acquired and liabilities assumed. Management’s assessment of qualitative factors affecting goodwill for each acquisition includes estimates of market share at the date of purchase, ability to grow in the market, synergy with existing Company operations and the payor profile in the markets. The fair value assigned to the intangible asset was determined
12

using the income approach, specifically the relief from royalty method. The process for estimating fair values requires the use of significant estimates, assumptions and judgments, including determining the timing and estimates of future cash flows and developing appropriate discount and royalty rates. The estimates of fair value are based upon assumptions believed to be reasonable using the best information available. These assumptions are inherently uncertain and unpredictable and, as a result, actual results may differ materially from estimates.
ASC Topic 805, Business Combinations, establishes a measurement period to provide the Company with a reasonable amount of time to obtain the information necessary to identify and measure various items in a business combination and cannot extend beyond one year from the acquisition date. Measurement period adjustments are recognized in the reporting period in which the adjustments are determined and calculated as if the accounting had been completed as of acquisition date. The Company expects to complete the final fair value determination of the assets acquired and liabilities assumed as soon as practicable within the measurement period, but not to exceed one year from the acquisition date.
Recently adopted accounting pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”) to improve reportable segment disclosures, primarily through enhanced disclosures related to significant segment expenses regularly provided to the chief operating decision maker (“CODM”) and by requiring current annual disclosures to be provided in interim periods. Additionally, it requires public entities with a single reportable segment to provide all the disclosures provided by the standard. ASU 2023-07 will be effective for the Company beginning with the fiscal year ended July 31, 2025, and for interim periods beginning in the fiscal year ended July 31, 2026, on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its Condensed Consolidated Financial Statements and related disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures (“ASU 2023-09”) to enhance the transparency and decision usefulness of income tax disclosures, primarily requiring disaggregated information about a reporting entitys effective tax rate reconciliation and income taxes paid. ASU 2023-09 will be effective for the Company beginning with the fiscal year ended July 31, 2026, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its Condensed Consolidated Financial Statements and related disclosures.
No other new accounting pronouncements issued or effective as of April 30, 2024 have had, or are expected to have, a material impact on the Condensed Consolidated Financial Statements or the related disclosures.
3.    Revenue
Disaggregated revenue information
The following table presents the percentages of consolidated net sales disaggregated by sales channels:
Three months ended April 30,Nine months ended April 30,
2024202320242023
Wholesale — Distributors
60.4 %68.6 %66.6 %68.9 %
Wholesale — California direct to trade(a)
16.0 17.5 16.9 17.4 
DTC(b)
23.6 13.9 16.5 13.7 
Net sales(c)
100.0 %100.0 %100.0 %100.0 %
_______________________________________________
(a) Includes $0.7 million of sales related to bulk and grape sales for both the nine months ended April 30, 2024 and 2023.
(b) Includes shipping and handling revenue of $1.2 million and $0.3 million for the three months ended April 30, 2024 and 2023, respectively, and $2.4 million and $1.4 million for the nine months ended April 30, 2024 and 2023, respectively.
(c) For the three and nine months ended April 30, 2024, excludes lease income of $0.3 million and $2.2 million, respectively, from Geyserville winery acquired in June 2023.
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Charges, recoveries and reductions related to credit loss on accounts receivable and the related allowance were immaterial for the three and nine months ended April 30, 2024 and 2023. The allowance for credit losses was $0.5 million as of April 30, 2024 and July 31, 2023.
Contract balances
When the Company receives payment from a customer, prior to meeting the performance obligation under the terms of a contract, the Company records deferred revenue, which represents a contract liability. The Company’s deferred revenue is primarily comprised of cash collected from wine sold through our DTC channel ahead of the wine shipment date. The Company does not recognize revenue until control of the wine is transferred and the performance obligation is met.
Deferred revenue included in other current liabilities within the Condensed Consolidated Statements of Financial Position was $1.1 million and $0.1 million at April 30, 2024 and July 31, 2023, respectively. The Company recognized revenue of $5.2 million and $3.2 million during the three months ended April 30, 2024 and 2023, included in the opening contract liability balance for the corresponding period. The Company recognized revenue of $0.1 million and $0.3 million during the nine months ended April 30, 2024 and 2023, included in the opening contract liability balance for the corresponding period.
4.    Business Combination
Sonoma-Cutrer
On April 30, 2024, (the “Closing Date”) the Company acquired 100% of the equity of Sonoma-Cutrer Vineyards, Inc., a wholly owned subsidiary of Brown-Forman Corporation (“the Merger”) which includes six estate vineyards spanning approximately 1,100 acres. Under the terms of the merger agreement, the Company acquired Sonoma-Cutrer for consideration valued at $317.5 million on the date of the closing of the acquisition. The Closing Date purchase consideration, inclusive of preliminary working capital adjustments, was comprised of $49.6 million, funded from the revolver portion of the Companys Credit Facility, and 31,531,532 shares of common stock issued for $267.1 million, determined based on the closing stock price of the Company’s stock of $8.47 per share on April 30, 2024. The Company estimates that $0.8 million of additional cash consideration will be payable within 90 days of the Closing Date pursuant to the working capital provisions included within the merger agreement, which is a preliminary estimate and subject to further adjustment.
The addition of Sonoma-Cutrer to the Company’s portfolio of luxury winery brands expands the Company’s portfolio of luxury Chardonnay and adds a well-renowned brand to the Companys portfolio. Sonoma-Cutrer produces and markets its luxury Chardonnay wine brand, sourced from vineyards in the Russian River Valley and Sonoma Coast appellations.
During the three and nine months ended April 30, 2024, the Company incurred $4.2 million and $8.6 million, respectively, of third-party transaction costs recorded in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.
The Company allocated the fair value of the purchase consideration to the assets acquired and liabilities assumed as of the Closing Date based on their estimated preliminary fair values. The excess of purchase consideration over the preliminary fair value of net assets acquired is recorded as goodwill. Due to the timing of acquisition close and magnitude of the acquisition, the preliminary fair value estimates and assumptions are subject to change as the Company obtains additional information over the measurement period. The primary areas of the purchase accounting that remain preliminary for completion of the related valuations relate to, but are not limited to, inventories, property and equipment, the intangible asset and related deferred tax impacts.
14

The preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed as of the Closing Date is as follows:
(in thousands)Amount
Total purchase consideration
$317,464 
Assets acquired:
Inventories
$61,419 
Prepaid expenses and other current assets372 
Property and equipment, net244,780 
Intangible asset (Trade name)17,000 
Other assets246 
Total assets
$323,817 
Liabilities assumed:
Current liabilities$(2,848)
Due to related party (Note 13)
(953)
Deferred income taxes(60,959)
Other liabilities(202)
Total liabilities
$(64,962)
Goodwill$58,609 
The intangible asset is recorded at fair value, as determined by Management based on available information. The fair value assigned to the trade name was determined using the income approach, specifically the relief from royalty method. The Company applied significant judgment in determining the fair value of the intangible asset, which involved the use of Level 3 inputs, including estimates and assumptions of future revenues, royalty rate and discount rate. The trade name is determined to have an indefinite useful life.
Goodwill related to the Sonoma-Cutrer acquisition is attributed to the benefit of a skilled workforce, brand strength in the luxury Chardonnay wine market, planned growth in new markets and synergies from combined sales, operational and administrative functions. The goodwill is deductible for tax purposes over a 15-year life.
Supplemental Unaudited Pro Forma Information:
For the three and nine months ended April 30, 2024 and 2023, the following table contains unaudited pro forma Condensed Consolidated Statement of Operations information of the Company as if the acquisition of Sonoma-Cutrer closed on August 1, 2022, the first day of Fiscal 2023.
Three months ended April 30,
Nine months ended April 30,
(in thousands)2024
2023
2024
2023
Net sales
$113,489 $118,182 $368,979 $370,788 
Net income
$20,932 $19,314 $65,655 $45,086 
The supplemental pro forma disclosures in the table above include adjustments for (i) depreciation expense that would have been recognized related to the acquired property and equipment, (ii) additional cost of sales related to the inventory valuation adjustment, (iii) acquisition-related costs, such as third party transaction costs, (iv) incremental interest expense associated with additional drawdown on the existing revolving line of credit, (v) fees in connection with the transitional services agreement, see Note 13 (Related party transactions) and (vi) the estimated income tax effect on the pro forma adjustments.
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This supplemental pro forma information is presented for illustrative purposes only and may not be indicative of the results of operations that would have been realized if the acquisition had been completed on the date indicated. In addition, future results may vary significantly from the results reflected in the supplemental pro forma information. The supplemental pro forma financial information does not reflect the impact of future events that may occur after the acquisition, such as anticipated cost savings from operating synergies.
5.    Inventories
Inventories were comprised of the following:
(in thousands)April 30, 2024July 31, 2023
Finished goods$142,896 $145,355 
Work in progress299,226 161,795 
Raw materials12,799 15,077 
Inventories$454,921 $322,227 
Inventories are stated at the lower of cost or net realizable value and are primarily measured on a first-in-first-out basis. The Company records valuation adjustments to the carrying value of its inventories based on periodic reviews of slow-moving, obsolete and excess inventory to determine the need for reserves by comparing inventory carrying values with their net realizable values upon ultimate sale or disposal. The Company’s estimates of net realizable value are based on historical experience as well as Management’s judgments with respect to future market conditions. In the period the Company determines a reserve is required, the Company recognizes a charge to cost of sales for the excess of the carrying value over net realizable value. The inventory reserve was $0.8 million and $0.9 million at April 30, 2024 and July 31, 2023, respectively.
The Company capitalizes into inventories depreciation related to property and equipment used in the production of inventory. For the three months ended April 30, 2024 and 2023, the amount capitalized was $6.8 million and $4.9 million, respectively, and $16.8 million and $13.5 million for the nine months ended April 30, 2024 and 2023, respectively. The Company also capitalizes total lease costs related to leases used in the production of inventory. The amount capitalized was $1.1 million and $1.2 million for the three months ended April 30, 2024 and 2023, respectively. For the nine months ended April 30, 2024 and 2023, the amount capitalized was $3.4 million.
In connection with the Sonoma-Cutrer acquisition, we acquired inventory of approximately $61.4 million on April 30, 2024. See Note 4 (Business Combination) for additional information.
6.    Property and Equipment, net
Property and equipment, net was comprised of the following:
(in thousands)April 30, 2024July 31, 2023
Land$309,818 $141,888 
Buildings and improvements120,196 92,960 
Machinery and equipment104,591 81,984 
Vineyards and improvements64,274 44,896 
Barrels51,281 34,944 
Construction in progress19,458 11,866 
Property and equipment, gross669,618 408,538 
Less: accumulated depreciation and amortization(103,812)(85,008)
Property and equipment, net$565,806 $323,530 
Depreciation expense recognized in selling, general and administrative expenses was $0.9 million and $0.4 million for the three months ended April 30, 2024 and 2023, respectively, and $4.2 million and $1.3 million for the nine months ended April 30, 2024 and 2023, respectively. In connection with the Sonoma-Cutrer acquisition,
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we acquired property and equipment, net of approximately $244.8 million on April 30, 2024, see Note 4 (Business Combination) for additional information.
See Note 5 (Inventories) for depreciation expense capitalized into inventory.
7.    Goodwill and Intangible Assets, net
Goodwill
Changes to goodwill as of April 30, 2024, were as follows:
(in thousands)
Goodwill as of July 31, 2023$425,209 
Addition for acquisition
58,609 
Goodwill as of April 30, 2024$483,818 
In connection with the Sonoma-Cutrer acquisition, the Company recognized goodwill of $58.6 million, during the three and nine months ended April 30, 2024. See Note 4 (Business Combination) for additional information regarding the acquisition.
Intangible assets, net
Intangible assets, net were comprised of the following:
April 30, 2024
(in thousands)Gross carrying amountAccumulated amortization
Net carrying amount
Definite-lived intangible assets:
Customer relationships$92,720 $(55,063)$37,657 
Total definite-lived intangible assets92,720 (55,063)37,657 
Indefinite-lived intangible assets:
Trade names
156,600 — 156,600 
Lane rights1,300 — 1,300 
Total indefinite-lived intangible assets157,900 — 157,900 
Total intangible assets, net
$250,620 $(55,063)$195,557 

July 31, 2023
(in thousands)Gross carrying amountAccumulated amortizationNet carrying amount
Definite-lived intangible assets:
Customer relationships$92,720 $(49,393)$43,327 
Total definite-lived intangible assets92,720 (49,393)43,327 
Indefinite-lived intangible assets:
Trade names139,600 — 139,600 
Lane rights1,300 — 1,300 
Total indefinite-lived intangible assets140,900 — 140,900 
Total intangible assets, net
$233,620 $(49,393)$184,227 
The Company recognized an indefinite-lived trade name of $17.0 million during the three and nine months ended April 30, 2024 related to the Sonoma-Cutrer acquisition, see Note 4 (Business Combination) for additional information.
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The Company’s amortization expense was $1.9 million for both the three months ended April 30, 2024 and 2023 and $5.7 million for both the nine months ended April 30, 2024 and 2023. Estimated future amortization expense for each of the following five fiscal years and thereafter is as follows:
(in thousands)Amount
Remainder of 2024
$1,890 
20257,560 
20267,560 
20277,560 
20287,560 
2029 and thereafter
5,527 
Total$37,657 
8.    Accrued Expenses
Accrued expenses were comprised of the following:
(in thousands)April 30, 2024July 31, 2023
Trade spend(a)
$10,835 $12,721 
Income taxes payable(b)
1,522 11,019 
Deferred compensation liability(c)
3,615 3,261 
Barrel purchases707 2,589 
Accrued professional fees595 599 
Bulk wine and other received not invoiced1,499 529 
Accrued invoices and other accrued expenses12,142 7,528 
Accrued expenses$30,915 $38,246 
_______________________________________________
(a) Trade spend refers to estimated amounts the Company owes to distributors for depletion-based incentives.
(b) Effective March 2023, as revised in October 2023, the IRS postponed certain tax filings and payment deadlines, until November 2023, in areas designated with eligible Federal Emergency Management Agency declarations. During the third fiscal quarter of 2023, the Company deferred federal and state tax payments which were paid in full during the nine months ended April 30, 2024.
(c) The Company intends to use the cash surrender value of life insurance policies to partially settle its deferred compensation plan liability. The cash surrender value of the life insurance policies was $3.4 million and $2.7 million at April 30, 2024 and July 31, 2023, respectively, and is included in other assets on the Condensed Consolidated Statements of Financial Position.
9.    Debt
Long-term debt, net of current maturities and debt issuance costs, was comprised of the following:
(in thousands)April 30, 2024July 31, 2023
Revolving line of credit$102,000 $13,000 
Term loan, first lien213,332 220,832 
Total debt315,332 233,832 
Less: Current maturities of long-term debt(9,721)(9,721)
Total long-term debt305,611 224,111 
Debt issuance costs(a)
(405)(492)
Total long-term debt, net of current maturities and debt issuance costs$305,206 $223,619 
_______________________________________________
(a) Debt issuance costs are the costs associated with the term loan facility. Debt issuance costs of $2.3 million and $2.8 million at April 30, 2024 and July 31, 2023, respectively, associated with the revolving credit and delayed draw term loan facilities are recorded in other assets on the Condensed Consolidated Statements of Financial Position.
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On November 4, 2022, Mallard Buyer Corp., Selway Wine Company and certain other subsidiaries of The Duckhorn Portfolio, Inc. (collectively, the “Borrowers”) entered into the Amended and Restated First Lien Loan and Security Agreement (“Credit Facility” and “Credit Agreement”) with the lenders named therein and BMO Harris (as successor in interest to Bank of the West), as administrative agent and collateral agent.
The Credit Agreement provides for $675.8 million in first lien senior secured credit facilities consisting of (i) a $425.0 million revolving credit facility, (ii) a $225.8 million term loan facility and (iii) a $25.0 million delayed draw term loan facility. The maturity date for loans borrowed under the Credit Agreement is November 4, 2027. The principal of the term loan facility is repayable in quarterly installments equal to $2.4 million, with a final installment equal to the entire remaining outstanding principal amount due on the maturity date.
The Credit Agreement allows the Borrowers, at any time, to request additional term loans, revolver commitments and delayed draw term loan commitments in an aggregate amount of up to $400.0 million (the “Incremental Facility”). The lenders are not under any obligation to provide the Incremental Facility, and the Incremental Facility is subject to certain customary conditions precedent and other limitations.
Borrowings under the revolver portion of the Credit Agreement generally bear interest based on the sum of the forward-looking term rate based on the Secured Overnight Financing Rate (“Term SOFR”) plus a loan margin based on average availability as follows: (a) less than or equal to 33% of average availability, a loan margin of 1.50%, (b) greater than 33% and less than or equal to 66% of average availability, a loan margin of 1.25%, and (c) greater than 66% of average availability, a loan margin of 1.00%. Borrowings under the term loan and delayed draw portions of the Credit Agreement generally bear interest based on the sum of (i) Term SOFR plus (ii) a credit spread adjustment of 10 basis points for 1-month and 3-month interest periods and 15 basis points for a six-month interest period plus (iii) a loan margin of 1.625%.
The Credit Agreement also includes an unused line fee and contains customary representations and warranties and affirmative and negative covenants for agreements of this type. In addition, the Credit Agreement requires compliance with the following financial covenants, in each case commencing from fiscal quarter ending January 31, 2023: (i) a debt to capitalization ratio not to exceed 0.55:1.00, measured at the end of each fiscal quarter and (ii) a fixed charge coverage ratio not to be less than 1.15:1.00, measured at the end of each fiscal quarter. As of April 30, 2024, the Company was in compliance with all covenants.
During the three and nine months ended April 30, 2024, we borrowed $50.0 million and $118.0 million, respectively, on the revolving credit facility. Of the $50.0 million borrowed for the three months ended April 30, 2024, a significant portion was used to fund the cash consideration of the Sonoma-Cutrer acquisition. See Note 4 (Business Combination) for additional information. At April 30, 2024 and July 31, 2023, the Company had unused capacity of $323.0 million and $412.0 million, respectively, under the revolving credit facility, excluding the incremental seasonal borrowing amount of an additional $30.0 million of capacity. There were no amounts outstanding on the delayed draw term loan, letter of credit sub-facility or the swingline sub-facility at April 30, 2024 or July 31, 2023.
10.    Derivative Instruments
The Company manages exposure to interest rates and foreign currency movements by entering into derivative contracts from time to time, as movements in such markets could impact the Company’s financial results.
The changes in estimated fair values of derivative instruments result from changes in interest rates and foreign currency exchange rates. Such changes serve to offset exposure in related business assets or liabilities. The Company is exposed to credit loss in the event of nonperformance by a counterparty. Certain of the Companys derivative instruments are subject to master netting agreements. In certain circumstances, this agreement allows the Company to net-settle amounts payable or receivable related to multiple derivative transactions with the same counterparty. The fair values of derivative instruments are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. Collateral is generally not required of the Company or of the counterparties to the master netting agreements, and no cash collateral was received or pledged under such agreements as of April 30, 2024 or July 31, 2023. The Company does not enter into derivative instruments for
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trading or speculative purposes. The Company does not apply hedge accounting treatment to derivative instruments.
On January 4, 2023, the Company entered into an interest rate swap that partially mitigates the risk to the Company due to potential future Term SOFR movements by trading floating rate payments for fixed rate payments on an applicable notional amount of outstanding variable rate debt. Effective September 30, 2022, the Company amended its interest rate swap initially entered into in March 2020, which expired on March 23, 2023, to transition from a London Interbank Offered Rate based floating rate to a Term SOFR based floating rate.
As of April 30, 2024, the Company held the following interest rate swap agreement, which fixed the interest rate on the applicable notional amount of outstanding variable rate debt:
Notional amount
(in thousands)
Interest rateEffective dateExpiration date
$100,0003.735%January 4, 2023November 4, 2027
The total notional amounts of the Company’s derivative instruments outstanding are as follows:
(in thousands)April 30, 2024July 31, 2023
Interest rate swap contract$100,000 $100,000 
Foreign currency forward contracts 5,610 
Total derivative instruments not designated as hedging instruments$100,000 $105,610 
The Company manages annual barrel purchases by engaging domestic and foreign cooperages to provide specified barrel quantities on agreed delivery dates. A significant portion of these invoices are paid in Euros. In order to reduce the foreign exchange risk associated with the Euro to U.S. Dollar conversion rate, the Company enters into foreign currency forward contracts, generally aligning settlement dates with expected barrel deliveries and the anticipated timing of payments to various coopers. See Note 12 (Commitments and contingencies) for additional information related to the Company’s barrel purchase commitments.
Results of period derivative activity
The estimated fair value and classification of derivative instruments on the Condensed Consolidated Statements of Financial Position for April 30, 2024 were as follows:
Derivative AssetsDerivative Liabilities
(in thousands)Balance Sheet ClassificationFair ValueBalance Sheet ClassificationFair Value
Interest rate swap contractOther assets$2,902 Other liabilities$ 
Foreign currency forward contract
Prepaid expenses and other current assets Other current liabilities 
Total derivatives not designated as hedging instruments$2,902 $ 
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The estimated fair value and classification of derivative instruments on the Condensed Consolidated Statements of Financial Position for July 31, 2023 were as follows:
Derivative AssetsDerivative Liabilities
(in thousands)Balance Sheet ClassificationFair ValueBalance Sheet ClassificationFair Value
Interest rate swap contract
Other assets$1,117 Other liabilities$ 
Foreign currency forward contractsPrepaid expenses and other current assets69 Other current liabilities 
Total derivatives not designated as hedging instruments$1,186 $ 
The amounts and classification of the gains and losses in the Condensed Consolidated Statements of Operations related to derivative instruments not designated as hedging instruments are as follows:
Three months ended April 30,Nine months ended April 30,
(in thousands)Classification2024202320242023
Interest rate swap contract
Other (income) expense, net$(2,975)$900 $(1,786)$3,273 
Foreign currency forward contractsOther (income) expense, net (18)69 (330)
Total (gain) loss
$(2,975)$882 $(1,717)$2,943 
11.    Fair Value Measurements
The Company applies a fair value hierarchy pursuant to ASC Topic 820, Fair Value Measurement, which consists of three levels of inputs used to measure fair value:
Level 1        Inputs to fair value are quoted prices in active markets for identical assets or liabilities;
Level 2        Inputs to fair value are based on observable data other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data such as interest rates or yield curves for substantially the full term of the instrument; and
Level 3        Inputs to fair value are based on unobservable data for the instrument and are supported by little or no market activity.
The following is a description of the valuation methodologies used for instruments measured at fair value in the Condensed Consolidated Financial Statements, as well as the general classification of such instruments under the valuation hierarchy.
Interest rate swap contract: The fair value of the Company’s interest rate swap agreement is estimated with the assistance of a third-party, using inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).
Foreign currency forward contracts: The fair value of the Company’s outstanding foreign currency forward contracts is estimated with the assistance of a third-party, using inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).
Deferred compensation plan: Contributions to the Company’s deferred compensation plan are managed by a third-party administrative agent. The fair value of the total contributed plan assets and liabilities are based on inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).
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The Company’s other financial instruments consist mainly of cash, accounts receivable, accounts payable, accrued expenses and debt. The carrying value of all other financial instruments, except debt, approximates fair value due to the short-term nature of these assets and liabilities. The carrying value of the Companys debt approximates fair value as the interest rates are variable and reflective of market rates (Level 2 of the fair value hierarchy).
The Company’s assets and liabilities measured and recorded at fair value on a recurring basis at April 30, 2024, were as follows:
(in thousands)Fair value measurements using:
Quoted prices in active markets (Level 1)Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
Assets:
Deferred compensation plan asset$ $3,423 $ 
Interest rate swap contract$ $2,902 $ 
Liabilities:
Deferred compensation liability$ $3,615 $ 
The Company’s assets and liabilities measured and recorded at fair value on a recurring basis at July 31, 2023, were as follows:
(in thousands)Fair value measurements using:
Quoted prices in active markets (Level 1)Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
Assets:
Deferred compensation plan asset$ $2,670 $ 
Interest rate swap contract
$ $1,117 $ 
Foreign currency forward contracts$ $69 $ 
Liabilities:
Deferred compensation liability$ $3,261 $ 
12.    Commitments and Contingencies
Long-term purchase contracts
The Company has entered into certain grape purchase contracts with various growers to supply a significant portion of its future grape requirements for wine production. Grapes are delivered during the harvest season, a period which generally spans from August to October. The original lengths of the contracts vary from one to 16 years, and prices per ton are either determined at the outset for the contract duration or are negotiated annually. The Company’s grape purchase contracts generally include acceptance provisions based on qualitative and quantitative grape quality characteristics. For the 2023 harvest, the Company purchased 32,000 tons of grapes at a total cost of $85.7 million which was recognized into inventory during Fiscal 2024. For the 2022 harvest, the Company purchased 29,000 tons of grapes for a total cost of $71.0 million which was recognized into inventory during Fiscal 2023. The Company also increases the scope of its grape contracts when necessitated by supply needs to meet production levels in future periods.
Purchase commitments
The Company enters into commitments to purchase barrels for each harvest, a significant portion of which are settled in Euros. As of July 31, 2023, the Company had $10.6 million in barrel purchase commitments. During the nine months ended April 30, 2024, the Company paid the remaining commitments and liabilities associated with
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barrel purchases for the 2023 harvest. As of April 30, 2024, the Company entered into barrel purchase commitments of approximately $12.5 million for the 2024 harvest. In order to reduce the foreign exchange risk associated with the Euro to U.S. Dollar conversion rate, the Company enters into foreign currency forward contracts, generally aligning settlement dates with expected barrel deliveries and the anticipated timing of payments to various coopers. The Company does not enter into these contracts for speculative purposes. Gains and losses on these contracts are recorded in other (income) expense, net on the Condensed Consolidated Statements of Operations. See Note 10 (Derivative instruments) for the total notional value and impact on the Condensed Consolidated Financial Statements due to foreign currency forward contracts.
The Company enters into various purchase commitments related to production activities. In December 2023, the Company entered into an equipment agreement resulting in a purchase commitment of $15.9 million. During the three and nine months ended April 30, 2024, the Company made nonrefundable advance payments of $2.4 million and $4.8 million, respectively, which are included in property and equipment, net, in the Condensed Consolidated Statement of Financial Position. Under the agreement, the Company is obligated to pay milestone payments as equipment and services are rendered of $10.4 million and $0.8 million, respectively, for the fiscal years 2025 and 2026.
The Company enters into various contracts with third parties for custom crush, storage, glass and bottling services. The costs related to these contracts are recorded in the period the service is provided. The contracts for custom crush services typically have minimums that the Company is required to pay if certain grape volume thresholds are not delivered. The Company does not record these minimums related to service contracts as contingent liabilities on the Condensed Consolidated Statements of Financial Position given the harvest yield size, resulting volumes and qualities of grape deliveries are not known or estimable until harvest, when all related contingencies would be resolved.
Contingent liabilities
The Company evaluates pending or threatened litigation, operational events which could result in regulatory or civil penalties, environmental risks and other sources of potential contingent liabilities during the year. In accordance with applicable accounting guidance, the Company establishes an accrued liability when those matters present loss contingencies which are both probable and reasonably estimable. As of April 30, 2024 and July 31, 2023, there were no material contingent obligations requiring an accrual.
On March 22, 2024, a former employee of the Company filed a putative class action in San Benito County Superior Court, seeking to represent all non-exempt workers of the Company in the State of California. The complaint alleges various wage and hour violations under the California Labor Code and related statutes. Plaintiff has also served a Private Attorneys General Act (“PAGA”) notice for the same alleged wage and hour violations. The claims predominantly relate to alleged unpaid wages (overtime) and missed meal and rest breaks. The lawsuit seeks, among other things, compensatory damages, statutory penalties, attorneys’ fees and costs. The Company has retained outside legal counsel to defend this action. The claim is in an early stage, and the amount of any loss cannot be reasonably estimated at this date. As July 31, 2023, there were no material contingent obligations requiring disclosure.
In the ordinary course of business, the Company enters into agreements containing standard indemnification provisions. The aggregate maximum potential future liability of the Company under such indemnification provisions is uncertain, as these involve potential future claims against the Company that have not occurred. The Company expects the risk of any future obligations under these indemnification provisions to be remote. As of April 30, 2024 and July 31, 2023, no amounts have been accrued related to such indemnification provisions.
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13.      Related Party Transactions
Effective April 30, 2024, in connection with the Sonoma-Cutrer acquisition, the Company entered into a transitional services agreement (“TSA”) with Brown-Forman, which is considered a related party transaction. See Note 4 (Business Combination) for additional information regarding the acquisition. The TSA governs services including certain distribution services, information technology services, finance and accounting services and sales and marketing services for a limited time to ensure an orderly transition following the acquisition. The agreed-upon charges for such services are intended to cover any costs and expenses incurred in providing such services to the Company by Brown-Forman (with a mark-up to reflect the management and administrative cost of providing the services). As of April 30, 2024, the Company did not have any related party transactions, receivables or payables outstanding with Brown-Forman under the terms of the TSA.
As of April 30, 2024, the Company had a related party payable of $1.7 million outstanding with Brown-Forman for payroll related transactions for Sonoma-Cutrer unrelated to the TSA and preliminary working capital adjustments related to consideration paid for the acquisition, which is a preliminary estimate and subject to further adjustment. The Company expects to settle this payable within 90 days of the Closing Date pursuant to the working capital provisions included within the merger agreement. See Note 4 (Business Combination) for additional information.
14.    Equity-Based Compensation
In March 2021, the Companys Board of Directors approved the 2021 Equity Incentive Plan (“2021 Equity Plan”), which provides for granting up to 14,003,560 shares of the Companys common stock. Restricted stock units (“RSUs”), non-qualified stock options (“stock options”) and performance-based restricted stock units (“PSUs”) are granted to certain employees of the Company, advisors and directors (collectively “grants”). The grants are considered equity awards for purposes of calculating compensation expense and are equity-classified in the Condensed Consolidated Statements of Financial Position.
Stock options
Stock option awards are valued using the Black-Scholes option pricing model to estimate the fair value of each stock option award on the date of grant and expense ratably over the vesting period, generally four years. Stock options have a ten-year term.
The following table represents the stock option activity:
Number of options outstanding
Weighted-average exercise price
(per share)
Weighted-average remaining
contractual life
(in years)
Aggregate intrinsic value
(in thousands)
Balance at July 31, 2023
2,321,233 $15.98 8.0$ 
Granted 1,267,560 9.89 
Exercised  
Forfeited(667,037)14.46 
Expired(395,174)16.41 
Balance at April 30, 2024
2,526,582 $13.26 8.3$ 
Exercisable as of April 30, 2024
748,117 $16.63 6.9$ 
The total unrecognized compensation expense related to the 2021 Plan stock options was $6.8 million as of April 30, 2024, which is expected to be recognized over a weighted-average period of 2.8 years. The weighted-average grant-date fair value of options granted during the nine months ended April 30, 2024 was $3.98 per share.
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The following assumptions were applied in the Black-Scholes option pricing model to estimate the grant-date fair value of the stock options granted:
Nine months ended April 30,
20242023
Expected term (in years)(a)
6.226.23
Expected dividend yield(b)
 % %
Risk-free interest rate(c)
4.09% - 4.55%
3.96 %
Expected volatility(d)
30.9 %33.9 %
_______________________________________________
(a) Calculated as the midpoint between the weighted-average time to vest and the time to expiration.
(b) The Company has not historically paid and does not expect to pay dividends in the foreseeable future.
(c) The risk-free rate was estimated from the U.S. Treasury Constant Maturity Rates for a period consistent with the expected term in effect at the grant date.
(d) Due to a lack of sufficient trading history of the Companys common stock, the expected volatility was estimated based on analysis of the historical and implied volatility of the Companys common stock and a group of guideline public companies deemed to be comparable publicly traded peers within the Company’s industry.
Restricted stock units
RSUs are valued using the closing market price of the Companys common stock on the date of grant. Expense is recognized ratably over the vesting period, generally four years for RSUs issued to employees and one year for RSUs issued to our independent directors.
The following table represents the RSU grant activity under the 2021 Plan:
Number of units
Weighted-average
grant-date fair value
 (per share)
Unvested as of July 31, 2023
562,861 $15.52 
Granted957,845 9.62 
Vested(250,226)14.51 
Forfeited(213,552)14.33 
Unvested as of April 30, 2024
1,056,928 $10.65 
The total intrinsic value of restricted stock that vested during the nine months ended April 30, 2024 was $2.5 million. The total unrecognized compensation expense related to the 2021 Plan RSUs was $9.9 million as of April 30, 2024, which is expected to be recognized over a weighted-average period of 2.6 years.
Performance-based restricted stock units
During the three and nine months ended April 30, 2024, the Company granted PSUs under the 2021 Plan, which are settled in shares of the Companys common stock if the market condition is met within a three-year period.
The shares vest immediately upon satisfaction of the market condition, which is based on the Company’s stock price.
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The following table represents the PSU grant activity under the 2021 Plan:
Number of units
Weighted-average
grant-date fair value
 (per share)
Unvested as of July 31, 2023
 $ 
Granted177,095 5.40 
Vested  
Forfeited  
Unvested as of April 30, 2024
177,095 $5.40 
The total unrecognized compensation expense related to the 2021 Plan PSUs was $1.0 million as of April 30, 2024, which is expected to be recognized over a weighted-average period of 1.2 years. The fair value of the PSUs was estimated on the date of grant using a Monte Carlo simulation model with the following assumptions:
Nine months ended April 30, 2024
Expected term (in years)(a)
1.2
Expected dividend yield(b)
 %
Risk-free interest rate(c)
4.8 %
Expected volatility(d)
43.0 %
_______________________________________________
(a) Based on the median time to vest among all Monte Carlo simulation paths that vest.
(b) The Company has not historically paid and does not expect to pay dividends in the foreseeable future.
(c) The risk-free rate was estimated from the U.S. Treasury Constant Maturity Rates for a period consistent with the expected term in effect at the grant date.
(d) The expected volatility was estimated based on analysis of the historical and implied volatility of the Companys common stock.
Compensation expense
During the three months ended April 30, 2024 and 2023, the Company recognized total equity-based compensation expense due to units vesting over their requisite service periods for all plans of $1.7 million and $1.7 million, respectively, and $5.0 million and $4.7 million for the nine months ended April 30, 2024 and 2023, respectively. The Company recognizes equity-based compensation in selling, general and administrative expenses, net of actual forfeitures as incurred, in the Condensed Consolidated Statements of Operations, except for amounts capitalized to inventories in the Condensed Consolidated Statements of Financial Position.
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15.    Earnings Per Share
Basic earnings per share is calculated by dividing the net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the dilution that would occur if any potentially dilutive instruments were exercised or converted into shares of common stock.
The following is a reconciliation of the Companys basic and diluted earnings per share calculation:
Three months ended April 30,Nine months ended April 30,
(in thousands, except share and per share amounts)2024202320242023
Numerator:
Net income attributable to The Duckhorn Portfolio, Inc.$13,323 $16,797 $44,717 $51,529 
Denominator:
Weighted average number of shares outstanding for basic per share calculation115,804,326115,255,671115,504,766 115,209,972 
Effect of dilutive potential shares(a):
Stock options1,546 867 5,472 2,390 
Restricted stock units28,247 110,917 116,944 212,672 
Adjusted weighted average shares outstanding for diluted per share calculation115,834,119115,367,455115,627,182 115,425,034 
Earnings per share attributable to The Duckhorn Portfolio, Inc.:
Basic$0.12 $0.15 $0.39 $0.45 
Diluted$0.12 $0.15 $0.39 $0.45 
_______________________________________________
(a) Calculated using the treasury stock method.
For the three months ended April 30, 2024 and 2023, there were 2.0 million and 0.7 million incremental common shares issuable upon the exercise of certain stock options, respectively, and for the nine months ended April 30, 2024 and 2023, there were 1.6 million and 0.5 million incremental common shares issuable upon the exercise of certain stock options, respectively, that were not included in the calculation of diluted earnings per share because the effect of their inclusion would have been antidilutive under the treasury stock method. For the three and nine months ended April 30, 2024, there were 0.1 million and 0.2 million incremental common shares issuable upon vesting of certain RSUs, respectively, that were not included in the calculation of diluted earning per share because the effect of their inclusion would have been antidilutive. Refer to Note 14 (Equity-based compensation) for the terms of the awards.
For the three and nine months ended April 30, 2024, the denominator includes the weighted average consideration of the issuance of 31,531,532 common shares on April 30, 2024 to partially fund the acquisition of Sonoma-Cutrer. See Note 4 (Business Combination) for additional information.
16.    Income Taxes
Income tax expense was $6.9 million and $6.0 million, with an effective tax rate of 34.1% and 26.3% for the three months ended April 30, 2024 and 2023, respectively, and $18.6 million and $18.4 million, with an effective tax rate of 29.3% and 26.3% for the nine months ended April 30, 2024 and 2023, respectively. The effective tax rates for both periods presented were higher than the federal statutory rate of 21% primarily due to the impact of state income taxes, discrete tax adjustments related to nondeductible transaction costs and the expiration of non-qualified stock options and vested restricted stock units shortfalls.
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For the three and nine months ended April 30, 2024, the effective tax rate increases were primarily due to the impact of permanent and discrete items compared to the three and nine months ended April 30, 2023, as a result nondeductible transaction costs of 8.8% and 2.8%, respectively.
17.    Subsequent Events
In May 2024, the Company entered into certain amendments on leases for production facilities and tasting rooms. The amendments are expected to increase the operating lease right-of-use assets by approximately $10.4 million, decrease the current portion of operating lease liabilities, which is recorded within other current liabilities on the Condensed Consolidated Statement of Position, by approximately $0.9 million and increase operating lease liabilities by approximately $11.3 million.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Cautionary note regarding forward-looking statements” included in this Quarterly Report on Form 10-Q. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in Part I “Item 1A. Risk factors” included in our Annual Report on Form 10-K for Fiscal 2023.
Introduction
Managements Discussion & Analysis is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and related notes to help provide an understanding of our results of business, results of operations and financial condition.
Management's Discussion & Analysis is organized as follows:
Overview. This section provides a general description of our business and industry trends, and a discussion of our key metrics for the three and nine months ended April 30, 2024. In addition, this section includes a discussion of recent developments and transactions affecting comparability that we believe are important in understanding our results of operations and financial condition, and in anticipating future trends.
Results of operations. This section provides a discussion of our components of results of operations and an analysis of our results of operations for the three and nine months ended April 30, 2024 as compared to the three and nine months ended April 30, 2023.
Non-GAAP financial measures and adjusted EBITDA reconciliation. This section provides a reconciliation of adjusted EBITDA, a non-GAAP financial measure, to net income attributable to The Duckhorn Portfolio, Inc., the most directly comparable measure prepared in accordance with U.S. GAAP for the three and nine months ended April 30, 2024 as compared to the three and nine months ended April 30, 2023.
Liquidity and capital resources. This section provides a discussion of our financial condition and liquidity as of April 30, 2024, which includes (i) a discussion of our sources of liquidity (ii) a discussion of our material cash requirements as of April 30, 2024; (iii) an analysis of changes in our cash flows for the nine months ended April 30, 2024 as compared to the nine months ended April 30, 2023; (iv) a discussion of our capital resources, including the availability under our credit facilities, our outstanding debt, covenant compliance and off-balance sheet arrangements as of April 30, 2024.
Critical accounting policies and estimates. This section discusses our critical accounting policies considered to be important to our results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 2 (Basis of presentation and recent accounting pronouncements) to the accompanying Condensed Consolidated Financial Statements.
Recent accounting pronouncements. This section discusses the potential impact on our reported results of operations and financial condition of certain accounting standards that have been recently issued.




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Overview
The Duckhorn Portfolio is the premier scaled pure-play producer of luxury wines sold for $15 or higher in North America. We offer a curated and comprehensive portfolio of luxury wines with suggested retail prices ranging from $20 to $230 per bottle. Our wines are available in all 50 states, the District of Columbia and over 50 countries under a world-class luxury portfolio of winery brands, including Duckhorn Vineyards, Decoy, Sonoma-Cutrer, Goldeneye, Paraduxx, Migration, Canvasback, Calera, Kosta Browne, Greenwing and Postmark. The U.S. is the primary market for our wines.
We sell our wines to distributors both inside and outside California and directly to trade accounts in California, which together comprise our wholesale channel. We also sell directly to consumers through our DTC channel, which includes eight tasting rooms, wine clubs and our e-commerce websites. Our powerful omni-channel sales model continues to drive strong margins by leveraging long-standing relationships.
The following factors and trends in our business are expected to be key drivers of our net sales growth for the foreseeable future:
Leverage our sales and marketing strength to gain market share. Leverage sales and marketing strengths to increase brand awareness, grow sales of our winery brands to our existing consumer base as well as a new generation of consumers and gain market share in a consolidating marketplace.
Insightful and targeted portfolio evolution. Launch winery brand extensions and continue evolving and strategically broadening our portfolio. For example, in January 2024, the Company announced the launch of Decoy Featherweight Sauvignon Blanc, which has 80 calories per five-ounce serving and an alcohol content of 9%, establishing a new presence in the lower-in-calorie/lower-in-alcohol wine category.
Expand and accelerate wholesale channel distribution. Capture distribution growth opportunities and accelerate sales to existing distributors, expand our geographical reach within the U.S. and retail accounts in California. As previously communicated, the Company has conducted a comprehensive evaluation of its distribution network and announced on May 24, 2024 that it has entered into distribution agreements with Republic National Distributing Company (“RNDC”) and Breakthru Beverage Group (“BBG”), with the goal of driving the profitable growth of the Company’s sales in the wholesale channel. It is expected that RNDC and BBG will begin distribution of Duckhorn’s wines in their respective new territories during the summer.
Continue to invest in DTC capabilities. Engage with our consumers, create brand evangelists and drive adoption across our portfolio through brand-specific tasting rooms, multiple wine clubs and our e-commerce websites, all of which enable us to cross-sell wines within our portfolio.
Evaluate strategic acquisitions opportunistically. Disciplined evaluation of strategic acquisitions when opportunities arise to create stockholder value. On April 30, 2024, we completed the acquisition of Sonoma-Cutrer for approximately $317.5 million as discussed below, see “—Key factors affecting our performance — Recent developments”. Sonoma-Cutrer is well-known for its luxury Chardonnay brand, with six estate vineyards in both the Russian River Valley and Sonoma Coast appellations, spanning approximately 1,100 acres. In addition, in Fiscal 2023, we purchased a state-of-the-art winemaking facility in Alexander Valley, California, which is nearly double the size of the Company’s previously largest production facility, and includes seven acres of planted Cabernet Sauvignon for approximately $54.6 million.

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Key financial metrics
We use net sales, gross profit and adjusted EBITDA to evaluate the performance of our business, identify trends in our business, prepare financial forecasts and make capital allocation decisions. We believe the following metrics are useful in evaluating our performance. Adjusted EBITDA should not be considered in isolation or as a substitute for any other financial information depicting our results prepared in accordance with U.S. GAAP. Certain judgments and estimates are inherent in our processes to calculate these key financial metrics. See “—Non-GAAP financial measures and adjusted EBITDA reconciliation” for additional information.
Three months ended April 30,Nine months ended April 30,
(in thousands)2024202320242023
Net sales$92,532 $91,242 $298,086 $302,901 
Gross profit$51,443 $50,511 $163,614 $160,407 
Net income attributable to The Duckhorn Portfolio, Inc.$13,323 $16,797 $44,717 $51,529 
Adjusted EBITDA$37,726 $35,820 $115,174 $110,298 
Net sales
Our net sales represent revenues less discounts, promotions and excise taxes.
Gross profit
Gross profit is equal to our net sales less cost of sales. Cost of sales includes all wine production costs, winemaking, bottling, packaging, warehousing and shipping and handling costs. Our gross profit and gross profit margins on net sales are impacted by the mix of winery brands we sell in our portfolio. See “—Key factors affecting our performance—Sales channels” for additional information.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income before interest, taxes, depreciation and amortization, purchase accounting adjustments, transaction expenses, acquisition integration expenses, changes in the fair value of derivatives, equity-based compensation, net lease income and debt refinancing costs. Adjusted EBITDA is a key performance measure we use in evaluating our operational results. We believe adjusted EBITDA is a helpful measure to provide investors an understanding of how management regularly monitors our core operating performance, as well as how management makes operational and strategic decisions in allocating resources. We believe adjusted EBITDA also provides management and investors consistency and comparability with our past financial performance and facilitates period to period comparison of operations, as it eliminates the effects of certain variations unrelated to our overall performance. See “—Non-GAAP financial measures and adjusted EBITDA reconciliation” for additional information.
Key operating metrics
We monitor the following key operating metrics to help us evaluate our business, identify trends affecting our business, measure our performance, formulate business plans and make strategic decisions. We believe the following metrics are useful in evaluating our business but should not be considered in isolation or, solely with respect to price / mix contribution, as a substitute for financial information prepared and presented in accordance with U.S. GAAP. Certain judgments and estimates are inherent in our processes to calculate these metrics.

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Net sales percentage by channel
We calculate net sales percentage by channel as net sales made through our wholesale channel to distributors, through our wholesale channel directly to trade accounts in California and through our DTC channel, respectively, as a percentage of our total net sales. We monitor net sales percentage across all three routes to market to understand the effectiveness of our omni-channel distribution model and to ensure we are deploying resources effectively to optimize engagement with our customers across our complementary distribution channels.
Three months ended April 30,Nine months ended April 30,
2024202320242023
Wholesale — Distributors
60.4 %68.6 %66.6 %68.9 %
Wholesale — California direct to trade
16.0 17.5 16.9 17.4 
DTC23.6 13.9 16.5 13.7 
Net sales100.0 %100.0 %100.0 %100.0 %
The composition of our net sales, expressed in percentages by channel for the three and nine months ended April 30, 2024, were impacted by DTC offering timing shifts. This shift was related to the Kosta Browne Appellation Series, our highest volume Kosta Browne offering, shifting primarily into the third quarter of Fiscal 2024, compared to the fourth quarter of Fiscal 2023. In our wholesale business, volume contributions decreased due to shipment pressure related to tighter management of inventory at wholesale and retailers, partially offset by an increase in trade accounts and points of distribution during the three and nine months ended April 30, 2024 compared to the prior periods. For discussion of intra-period seasonality, see “—Key factors affecting our performance—Seasonality”.
Net sales growth contribution
Net sales growth is defined as the percentage increase of net sales in the period compared to the prior year period. Contribution to net sales growth is calculated based on the portion of changes in net sales for a given period that is driven by two factors: changes in sales volume and changes in sales price and mix. Volume contribution presents the percentage change in cases sold in the current year period compared to the prior year period. Price / mix contribution presents net sales growth less volume contribution and reflects that, in addition to changes in sales volume, changes in net sales are primarily attributable to changes in sales price and mix.
Three months ended April 30,Nine months ended April 30,
2024202320242023
Net sales growth (decline)
1.4 %(0.4)%(1.6)%2.9 %
Volume contribution(4.6)%3.5 %(3.5)%4.2 %
Price / mix contribution6.0 %(3.9)%1.9 %(1.4)%
Price / mix contribution for the three and nine months ended April 30, 2024 benefited from channel mix related to the DTC offering shifts. Additionally, price / mix contribution for the nine months ended April 30, 2024 benefited from lower discounts in our wholesale channel. For the three and nine months ended April 30, 2024, the negative volume contribution was driven by volume declines in our wholesale channel. Volume contribution continues to be impacted by tighter inventory control across the supply chain and softer demand, partially offset by trade account growth for the three and nine months ended April 30, 2024 compared to the prior periods.
For the three and nine months ended April 30, 2023, the decrease in price / mix contribution was impacted by DTC offering shifts and outsized volume growth of the wholesale channel, partially offset by price increases.
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Key factors affecting our performance
Sales channels
Channel mix can affect our performance and results of operations, particularly gross profit and gross profit margin.
Wholesale channel. Consistent with sales practices in the wine industry, sales to distributors and to trade accounts in California occur below suggested retail price. We work closely with our distributors to increase the volume of our wines and number of products that are sold in their respective territories. Our wholesale channel constitutes a greater proportion of our net sales than our DTC channel.
DTC channel. Wines sold through our DTC channel are generally sold at suggested retail prices. DTC channel sales represent important direct connections with our customers. DTC channel sales growth will generally be favorable to price / mix contribution and gross profit margin in periods where that channel constitutes a greater proportion of net sales than in a comparative period.
Wholesale channel sales made on credit terms generally require payment within 30-90 days of delivery. In periods where the net sales channel mix reflects a greater concentration of wholesale sales (which typically occurs in our first and second fiscal quarters), we typically experience an increase in accounts receivable for the period to reflect the change in sales mix, with payment collections in the subsequent period generally reducing accounts receivable and having a positive impact on cash flows in such subsequent period.
While we seek to increase sales in both channels, we expect that our future sales will continue to be substantially comprised of sales in the wholesale channel. We intend to maintain and strengthen our long-standing relationships within our network of distributors, which we believe will be critical to our continued growth and success. In the wholesale channel, we are positioned as a “one-stop shop” for all the luxury and ultra-luxury needs of our consumers, distributors and retailers.
In the DTC channel, our holistic approach to consumer engagement both online and offline is supported by an integrated e-commerce platform and portfolio wine shop, eight distinctive tasting room experiences located throughout Northern California and Washington, and several award-winning wine clubs, all of which enable us to cross-sell wines within our portfolio. Growth in our DTC channel or shifts in our member offerings will impact the price / mix contribution and gross profit margins in the impacted periods.
Seasonality
Generally, our net sales are typically highest in the first half of our fiscal year, predominantly due to increased consumer demand around major holidays. Net sales seasonality differs for wholesale and DTC channels, resulting in quarterly seasonality in our net sales that depends on the channel mix for that period. We typically experience a higher concentration of sales through our wholesale channel during our first and second fiscal quarters due to increased purchasing by distributors in anticipation of higher consumer demand during the holiday season. This dynamic generally results in lower average selling prices due to distributor and retail sales discounts and promotions in our wholesale channel. See “—Key operating metrics.” In Fiscal 2023, our net sales in the first, second, third and fourth fiscal quarters represented approximately 27%, 26%, 23% and 24%, respectively, of our total net sales for the year.
Agribusiness
We have developed a diversified sourcing and production model, supported by our wineries, world-class and strategically located vineyards controlled or owned by the Company (“Estate properties”) and strong relationships with quality-oriented growers. In addition, our sourcing model includes the purchase of high-quality bulk wine from established suppliers to add a highly flexible element of diversity to our supply model. Generally, approximately 10% of the grapes are sourced from our Estate properties, with approximately 90% sourced from third-party growers. Our ability to adjust the composition of a particular vintage among our grape and bulk wine sourcing supply channels allows us to tailor inputs based on varying market or seasonal factors, which we believe enables us to produce the highest possible quality wine while optimizing gross profit.
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With the acquisition of Sonoma-Cutrer, we expect further optimization of the grape supply and production model with the addition of approximately 1,100 acres of estate vineyards in the Russian River Valley and Sonoma Coast appellations. See “—Key factors affecting our performance — Recent developments” below for additional information.
Consistent with other agriculture enterprises, the cost of our wine fluctuates due to annual harvest yields, which vary due to weather and other events. In addition to agricultural factors, price volatility in the grape and bulk wine markets, competition for supply and seasonal labor costs also impact our cost of sales. We may continue to experience fluctuations in the costs of producing wine, which could impact our gross profit.
Inventory lifecycle
Grape growing on our Estate properties
Approximately 10% of the grapes are sourced from our Estate properties. Once a vineyard reaches consistent yield levels, approximately three to five years after planting, it will generally produce a relatively consistent amount of fruit for approximately 15 to 25 years, at which time blocks of the vineyard will gradually be replanted in stages after a period of lying fallow. The length of time between initial investment and ultimate sale of our Estate wines, coupled with the ongoing investment required to produce quality wine, is not typical of most agricultural industries.