Willamette opened a new tasting room called the Wine Center located in McMinnville, OR, that serves as a new retail location in the fourth quarter of 2009. This new location contributed to an increase in retail sales in the first quarter, while net revenues were down a mere 2%. Other financial highlights for the quarter are detailed below.
The wineries and distilleries producers operate in an interesting industry. First of all, this business is cost-heavy due to seasonality and variable cost factors that include labor and allowances for obsolete inventories that occur from the wholesale business most wine distributors have. For the first quarter 2010, Willamette was able to move these obsolete inventories as detailed below thanks to major investments in inventory controls and refocusing by sales staff. More obvious than those challenges are the fact that the industry belongs to the consumer goods sector, a sector infamously known for sensitivity to changing consumer tastes and macro-economic trends. After 28 years in the business, Mr. Bernau says the recent recession was particularly hard on the customers. In Oregon, where one in five citizens are currently recipients of food stamps and the unemployment beats national averages at 11.7%, Willamette's margins have suffered along with the macro-economic downturn and recovery.
Mr. Bernau is optimistic; the higher costs of goods sold recorded during the period are not expected to persist.
Partly because the demand for Willamette's flagship wine, the pinot noir, has escalated in recent years, Mr. Bernau is proud to have retained the customers who drink the wine he loves to produce. "The pinot noir drinkers are a unique group of people" he said, speaking over the phone from his Oregon office, "they are a sophisticated and well-educated; really great customers to have. We feel really lucky to be serving this market niche". The cool climate red wine grape variety associated with the French Burgundy region has enjoyed an outburst in popularity in the last few years, surprisingly enough to Mr. Bernau and his team, among young, hip culinary enthusiast s who consider pinot noir to be the best red wine food companion. The climb to admiration in the U.S. for pinot noir had already been steadily building up when the movie Sideways triggered an explosion in demand and consumption for the variety Willamette sold by Willamette. Mr. Bernau offered rather explicitly that Willamette's 08' pinot noir vintage promises to be the best wine they've ever produced.
First Quarter 2010 Financial Highlights Include:
- A shift in the mix of sales from produced brands to purchased brands in our Oregon wholesale market where we achieve a lower gross profit has adversely impacted gross margins in the first quarter 2010. The company generated ($0.04) basic earnings per share during the three months ended March 31, 2010, a decrease of $0.07 basic earnings per share versus the comparable prior year period.
- In 2009, management implemented a new inventory management and purchasing system to identify and prevent the accumulation of purchased wine inventory that could sour if not sold. From October 2009 to the end of the 1st Quarter 2010, aged wine inventory has been reduced from $698,332 to $543,034.
- The company should benefit with the release of the 2009 vintage beginning with the '09 Whole Cluster Pinot Noir in June. Provided the Company can maintain its general price position, operating income from produced wines should improve.
- The company announced that a Memorandum of Understanding (NASDAQ:MOU) between Hong Kong and Oregon and Washington states was signed on May 24, 2010 in Hong Kong, and Willamette would be participating. Under the MOU, the three places will strengthen co-operation in promoting wine-related trading, tourism, investment, education and the fight against counterfeits. With a knack for trade promotion, Hong Kong presents an ideal platform for companies from the two states to market their boutique wines to Asian clients. Since eliminating duties just over two years ago, the value of wine imported into Hong Kong from the U.S. has increased five-fold. While opening up exciting avenues for the wine industry in the respective places, the MOU also signifies a new chapter in bilateral relations between Hong Kong and Oregon and Washington.
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