Truett-Hurst reports sales increase, but trouble for new wine spritzer brand

Truett-Hurst Inc. announced Thursday that it is killing off its highly touted wine spritzer brand sold exclusively in Kroger stores because of poor sales, providing another black mark for the Healdsburg vintner in a year that has been plagued by packaging problems.

The company made the announcement during an investor call to discuss its fiscal 2015 results. It reported that net sales increased 21 percent last year, from $22.1 million to $26.6 million. But that news was tempered with less positive factors: its cost of sales increased 22 percent to $17.9 million and its operating expenses increased 26 percent to almost $11 million.

Truett-Hurst said Thursday it had more bad news in the marketplace with its California Winecraft brand, which comes in single-serving cans featuring a mixture of red wine and fruit juice; another selection comes with sauvignon blanc and lemon-lime soda.

The product launched in the fourth quarter, but Truett-Hurst has decided to leave the business because of poor performance, said Phil Hurst, chief executive officer.

“At this time, we have decided to exit this business and write down the inventory,” Hurst said in an investor call.

The cans were sold exclusively to the Kroger Co., but the wine company noted that the number of stores stocking the product fell short of Kroger’s initial guidance and Truett-Hurst’s expectations, resulting in excess inventory. The product cannot be sold elsewhere because of the deal with Kroger, the nation’s largest grocery store chain, and Truett-Hurst has set aside a $500,000 reserve for the potential loss.

That setback is particularly stinging for the company, which had its initial public offering in June 2013. Hurst has said its private label business had represented a significant growth area for the company given its executives’ strong relationships with retail chains. Hurst previously had worked at one of the largest private label providers, Winery Exchange Inc. Last year, private and custom labels represented 60 percent of Truett-Hurst’s business.

And it comes at a time when major wine companies are entering the can business, seeing it as a new way to reach millennial consumers. E&J Gallo is testing a canned version of its Barefoot Refresh Spritzer and it now is available in Arizona, North Carolina and Minnesota; and The Wine Group introduced in May its Flipflop brand in cans.

Hurst tried to put a positive spin on the topic, noting that it still has two 750-milliliter wine bottles exclusive to Kroger under its Sonoma Ranches brand. “We are hopeful we can grow upon that. If we get through the California Winecraft exit smoothly with Kroger, we are hopeful we can grow some new brands with them,” he said.

California Winecraft was not the worst-performing move in 2015 for the company. Truett-Hurst earlier this year posted $800,000 in charges for loss contingencies and expired inventory stemming from its Paper Boy brand, where manufacturing problems plagued the unique bottle composed of cardboard with a plastic liner.

It was notified in January that some Paper Boy wines were past their shelf life and had partially oxidized, though the wines did not pose a health hazard to consumers. The U.K. manufacturer of the brand then filed for bankruptcy.

On Thursday, it also announced that it was taking a write-down of $400,000 for The Wine Spies, a flash sales website where it has partial ownership, as it experienced slumping sales in the fourth quarter, said Paul Forgue, chief financial officer.

The company in the future will focus much less on innovative packaging and concentrate more on its relationship with the top five wine retailers - it has struck a deal with Target with its Republic of Wine brand and that partnership will expand into three new items for the fall. It also wants to grow its direct-to-consumer business.

“It’s been a difficult year in 2015 with Paper Boy and California Winecraft,” Hurst said. “We’ve learned a lot of lessons this year and it’s helped us refine our strategy.”

The company’s balance sheet shows its cash assets on hand is $3.9 million less than at the end of fiscal 2014, standing at $1.7 million as of June 30. But it has attempted to assuage investor concerns as it announced in July that it renewed its credit facility with the Bank of the West by $1 million up to a total of $10 million.

Its stock has declined significantly from a year ago, from $5.40 per share on Sept. 26, 2014 to $1.45 per share for Thursday’s close.

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.