Ladies and gentlemen, thank you very much for joining us today, and welcome to the presentation for Naked Wines financial year 2022 results. I'm gonna start off by giving you a little context, and then I'll hand over to our CFO, Shawn Tabak, who'll take you through the details of the financial results. Then I want to talk to you some more about the outlook for financial year 2023 and our long-term growth plans. Firstly, a reminder about the problem we exist at Naked Wines to solve. The wine industry, it's one of the oldest industries in the world. Don't know where it is on that ranking, but it's high up. But it has some fundamental problems, and Naked exists to try and bridge those. At heart, we're looking to solve problems for two stakeholders: for winemakers and for consumers.
On the winemaker side, the biggest challenges we see are barriers in terms of access to capital. Put simply, making wine is expensive. Scaling a business, if you're an independent winemaker and delivering growth, is very capital intensive. Then secondly, a challenge around distribution, and I think this is most acute in the U.S. market, which is our largest market, where we have our largest addressable market opportunity. That is that a very small number of gatekeepers control access to most retail points of distribution in the U.S. Even if you make great wine or have the financing to produce that, getting your product in front of customers is very challenging. On the consumer side, we see often an illusion of choice. Retailers offering hundreds of products that may be produced predominantly by three or four large producers.
We also see that a lot of times, what you pay for as a consumer isn't the direct cost of production, especially in the U.S., where the three-tier system adds a lot of intermediary cost and Americans pay more for wine than consumers do anywhere else on Earth. We think consumers are not getting fair value for money. Finally, I don't think the wine industry has done a great job of responding to clear consumer desire for heightened provenance and a sense of the people behind the products they're consuming. If you look, for example, at the way the craft beer industry has helped beer drinkers understand where their beer came from, who made it, and why they're passionate about it, I believe there's a real imperative for the wine industry to do that better.
Now, at Naked, we look to solve these problems by bringing winemaker and consumer together. When you do that, a few great things happen. For winemakers, we're able to solve the first challenge, that of access to capital, by supporting them. Harnessing the power of nearly a million members globally, we're able to provide winemakers with the capital they need to get started, and indeed, to finance the growth of their brands as they're successful. We do that in a unique way that preserves for them a sense of autonomy, making wines they're truly passionate about, and we do that in a way that enables them to access great reward, and that's a unique combination for winemakers. We also then solve the second problem. Our winemakers make brands exclusively for Naked Wines with a guarantee of sale.
That means we solve their challenge around distribution, and those products are exclusively available to our Angel members. In doing that, for consumers, we're able to offer greater value for money. Because they've helped to make these wines possible, and because we're selling directly with no intermediaries, we're able to offer amazing quality and much better value than the market. Consumers get access to exclusive wines from world-class winemakers and have a direct connection to them, being able to chat backwards and forwards on our app, meet them in person at events like our tasting tour going on in the U.K. as we speak. We call that a unique wine proposition. It's working at scale. We've built Naked over 10 years in the U.S. and Australia and 14 years in the U.K. to be the world's largest direct consumer wine business.
We have nearly one million active Angels around the world and have grown group revenue to GBP 350 million. What we're doing is working and is proven at scale. Now, I'm gonna come back and talk to you a little bit more about our plans for FY 2023 later, but I'm gonna hand over now to our CFO, Shawn, who's gonna take you through the detailed financial results for FY 2022. Over to you, Shawn.
Thanks, Nick. I'm gonna start out by highlighting some of the key performance themes that we saw from our fiscal year 2022. Overall, Naked Wines continues to disrupt the wine industry with a superior value proposition for both winemakers and consumers. We've come quite a long way in building what today is a preeminent online wine marketplace, and we still have significant opportunity to grow and scale the business by capturing more of our estimated $25 billion total addressable market. We look to do so by investing intelligently in customer acquisition and our value proposition. We persistently employ a data-driven focus on unit economics. In fiscal year 2022, Naked Wines delivered continued increase in total sales on top of significant acceleration that we saw in the business in the prior year.
Overall, we once again increased our subscriber or active Angel base and achieved strong repeat customer sales retention of 80%. Looking at our top financial KPIs. Group sales was GBP 350 million, which was a 5% increase over the prior year on a constant currency basis, or 3% on a reported basis, and was driven by strong demand from existing members. We've significantly increased the scale of the business over the last few years and continued to increase total sales in fiscal year 2022.
On a two-year stack basis, group sales increased 78% on a constant currency basis. Repeat customer contribution profit was GBP 86 million, relatively flat with the prior year, driven by a 13% increase in repeat customer sales on a constant currency basis, and offset by higher logistics and transportation costs due to the global supply chain disruption. We invested GBP 41 million in acquiring new customers, which was less than we did in fiscal year 2021, when we accelerated to capture the decrease in acquisition costs during COVID-19 lockdowns. To put our fiscal year 2022 investment levels in context, it was 76% higher than we did in fiscal year 2020. Importantly, we delivered adjusted EBIT profit of GBP 2 million, driven by strong demand from existing members and strong expense control. Turning now to costs.
Gross profit was GBP 142 million with a gross margin of 40%, which is a 60 basis point increase over the prior year, driven by a higher mix of repeat versus new customer sales, as well as improvement in Australia gross margins. Fulfillment costs as a percentage of total sales were slightly higher in fiscal year 2022, at 18% of total sales versus 17% in the prior year. The increase was primarily driven by increased logistics and transportation costs. During the year, we implemented automation in our U.K. distribution center and remodeled our U.S. distribution network. The latter resulted in additional non-recurring costs of approximately GBP 1.1 million to transport inventory from our legacy Napa warehouse to four warehouses that are closer to both our distribution centers and our customers.
Advertising costs were 10% of total sales, which is a 270 basis point decrease over the prior year that primarily reflects lower new customer investment spend than initially planned due to the challenging market environment and lower five-year payback of customer cohorts, which I'll talk about in more detail shortly. General and administrative costs were 12% of total sales, a 160 basis point increase over the prior year, reflecting investments in technology-related costs to improve the customer experience and investments in strategic initiatives to drive growth and the customer proposition. Shifting now to repeat customers, which are our subscription customers or Angels that have made their first monthly subscription payment.
Repeat customer sales was GBP 315 million, a 13% increase over the prior year on a constant currency basis, or 11% on a reported basis, driven by enhancements to our customer proposition with a broader range and the addition of more talented winemakers to our platform. Repeat customer contribution profit was GBP 86 million, resulting in a 27.4% margin, which was a 250 basis point decrease over the prior year, driven by higher storage, transportation, and logistics costs in the U.S. and U.K., as well as non-recurring costs for the U.S. distribution network remodel, and offset by higher margins in our Australia business unit. Repeat customer sales retention was 80%, which was above our expectations.
We had 964,000 active Angels at the end of fiscal year 2022, which was a 9% increase over the prior year, reflecting the strength of the proposition with a strong comparative to the prior year. You can see here that our margins have improved compared to fiscal year 2020, benefiting from the increased scale in the business and offset by the inflationary cost environment that we saw in fiscal year 2022. Here you can see the impact of repeat gross margins improving and offset by higher fulfillment costs in the business, driven by the global supply chain disruption and the resulting increases in transportation and logistics costs. This slide shows the group contribution profit by cohort and percentage contribution retained in fiscal year 2022.
As mentioned, our strong consumer proposition is driving high sales retention in the business. Those loyal customers are driving a solid base of contribution profit. Of our GBP 86 million of repeat contribution profit in fiscal year 2022, only GBP 10.8 million was from cohorts that we acquired in the year. The remaining 87% was from cohorts that we acquired in prior years. It's also worth noting that we retain a high percentage of cohort contribution profit year-over-year, and we find that retention improves as the cohorts age. This year, the contribution profit that we retained was less than in prior years, driven by the year-over-year decrease in margins due to the global supply chain disruption. Said differently, the revenue retention of these cohorts is similar to prior periods with even higher year-over-year cohort retention.
This strong retention I've just talked about leads to cash flow from our customer cohorts. We have generated strong returns on our investment spend over the past 10 years with cumulative contribution profit of GBP 350 million on GBP 190 million of initial investment. That means we've generated over GBP 190 million of contribution profit in excess of our investments over this time frame. Importantly, all of our cohorts from FY 2013 through fiscal year 2021 have already paid back. Standstill EBIT, shown here, is the adjusted EBIT that we report if we had only invested in new customers to replenish the current customer base rather than for both replenishment and growth. Standstill EBIT was GBP 21 million.
Additionally, in response to feedback from shareholders, we've added an additional standstill EBIT calculation, which uses a trailing three-year simple average for sales retention and year one payback to help normalize these metrics from the variations that we have seen over the last few years due to the pandemic-related lockdowns. On this pro forma basis, standstill EBIT totaled GBP 27 million. Turning to our key performance indicators for our investment in new customers. Our business model is built around investing in new cohorts of customers and then earning return on that initial investment over the lifetime of the customer cohort. To acquire new customers, we incur a cost in the form of a discount that we provide on the purchase of a first case of wine, and then we also incur advertising costs as well.
In fiscal year 2022, investment in new customers was GBP 41 million compared to GBP 50 million in the prior year, reflecting new customer contribution loss of GBP 7 million and advertising costs of GBP 34 million. The five-year forecasted payback for fiscal year 2022 cohort was 1.5x, below our prior year five-year forecast payback of 2.6x, driven by changes in the consumer environment as well as higher performance marketing and fulfillment costs. Overall, we've seen an improvement in the five-year forecasted payback of cohorts acquired in the second half of fiscal year 2022. However, we have also seen two changes, mostly the cohorts acquired in the first half of the fiscal year.
First, as our cohorts have aged, we have seen higher churn early in the consumer life cycle than our models initially predicted. In the U.K., in particular, we believe we have an opportunity to move toward a higher value trial offer with lower discount and ultimately acquire a higher value customer than we did in fiscal year 2022. Second, we also updated our models to reflect lower contribution margin during what we expect to be continued supply chain disruption period. Together, these two changes decreased our LTVs, which impacted payback by approximately 30 basis points. Turning now to look at our fiscal year 2022 results by our three main geographies, the U.S., the U.K., and Australia. Starting here with sales.
The U.S. is our biggest market opportunity and our largest business, with total sales of GBP 157 million, representing 45% of the total group. In the U.S., repeat customer sales increased 11% on a constant currency basis over the prior year. We expect to see a continued shift toward the U.S. segment as we continue to take market share in the U.S.. Our U.S. business is currently approximately 1% of the total addressable market in the U.S., and we see an opportunity to significantly increase our penetration in that market. Total U.K. sales were GBP 147 million, and total Australia sales were GBP 46 million. Moving on to segment profits. The U.S. delivered the highest repeat profit of GBP 47 million with a margin of 34%.
That was also the highest of the group due to the three-tier distribution system in the region that drives higher prices. U.S. repeat customer contribution margin declined 330 basis points year-over-year, impacted by higher storage, transportation, and logistics costs, as well as the U.S. distribution network model. We have the most pricing power in our U.S. market, with embedded competitive and scale advantages, and expect to see margins return over time. We invested GBP 23 million in acquiring new customers in the U.S., a decrease over the prior year based on the changing market conditions and inflationary cost environment. In the U.K., repeat customer contribution profit totaled GBP 28 million, with an investment in new customers of GBP 14 million. In Australia, we set out the year focused on improving the unit economics as a basis for increasing our growth investment there.
Our approach was to improve the unit economics driven by price increases across the range, as well as through rationalization of the wine in the portfolio. As a result, repeat contribution margins increased 240 basis points over the prior year. We continue to invest in opportunities across all geographies to support sustainable and responsible growth of the business. Now on to the balance sheet. We ended the year with a strong balance sheet and cash on hand of GBP 40 million. Having restocked, we also finished fiscal year 2022 with GBP 142 million of fantastic wine inventory. We also added a $60 million headline credit facility with a syndicate of banks led by Silicon Valley Bank.
This facility allows us to borrow against our U.S.-based inventory and will provide additional liquidity to the business. Over the next 12 months, we expect to continue to increase inventory levels, which the credit facility can be used for as needed. Free cash flow used in fiscal year 2022 was GBP 44 million, primarily driven by restocking of our inventory levels following lower inventory levels at the end of last fiscal year. As a reminder, our capital allocation philosophy is predicated first on maintaining sufficient cash and liquidity to operate the business, given the seasonality in our inventory purchasing cycle and our sales. From there, we allocate capital toward growth investments that generate a return in excess of our internal hurdle rate. After that, if we identify that we have excess capital, this will be returned to shareholders.
Given the growth opportunities in front of us, we are not proposing any distributions or returns of capital to shareholders at this time. Looking ahead, we're focused on executing against our core growth strategies, investing in the business at attractive returns, and increasing shareholder value over the long term. With this in mind, we plan to continue to evolve our market-leading offering in fiscal year 2023 to deliver a superior value proposition to both consumers and winemakers while focusing on improving the early life retention and conversion of new customers. At the same time, we're focused on optimizing our early life consumer offering to drive customer acquisition at scale and investing to build brand awareness, perception, trust, and comprehension of the Naked Wines value proposition in all of our markets. There are a few themes that are relevant to our fiscal year 2023 guidance.
First, we have seen and continue to expect a measure of enduring inflationary pressure in all markets. Second, consumer sentiment has been impacted by inflation and the geopolitical environment, which we expect to continue to some measure. Finally, as we shift our U.K. business towards a more premium offering, we expect to invest approximately GBP 5 million less in new customers in that market, with resulting in relatively flat year-over-year sales as we reposition the customer base toward a higher quality revenue. Given the current macroeconomic environment, we expect to manage to a break-even adjusted EBITDA, excluding share-based compensation and non-cash charges. Additionally, given this uncertainty, we are providing the following guidance. Total group sales ranging from GBP 345 million to GBP 375 million, which is a year-over-year change of -4% to +4% on a constant currency basis.
Investment in new customer acquisition range of GBP 30 million-GBP 40 million. Repeat customer contribution profit range of GBP 83 million-GBP 93 million. General and administrative cost range of GBP 45 million-GBP 48 million. Additionally, we expect to invest GBP 5 million in marketing R&D and incur GBP 4 million of share-based compensation charges. Now I'll hand it back over to Nick to cover our strategic plan.
Thank you very much, Shawn. About the fourth time we're doing this remotely, and I'm still struggling to unmute myself. Some of us never learn. I wanna talk about three things in this section. Firstly, I want to draw out a few important themes that sit behind the numbers Shawn just walked us through for fiscal year 2022. Then I want to talk to you a little more about the way as a management team we intend to be operating the business over the course of fiscal year 2023, and particularly in light of some of the market context that Shawn talked about there when reviewing guidance. Then I want to talk about our strategic growth initiatives. Firstly, onto the observations on fiscal year 2022. I think for me there are three really important things to draw out here.
Firstly, our proposition continues to resonate with members. I think in some ways the headline numbers obscure this. You know, the level of repeat sales growth this year was very encouraging. We saw slower growth in repeat contribution as we saw some unusual margin pressure. But the sales retention number again, 80%, you know, is ahead of our expectations and we're very pleased with that. That's really important because we've doubled the size of the business and the additional members we've brought in appreciate what we're doing. They love that they're getting better quality wine for their money and a direct connection to winemakers. The second theme is around us doing what we say we'll do in terms of investment. We've always promised to be data-led in terms of where we invest.
In the course of this year, as we've not generated the return that we have in the past and that we seek to deliver, we've pulled back our level of investment spend and managed the business delivering a beat to expectations at an EBIT level for the year and profitability. I'm gonna talk more about those investment challenges shortly and what we're doing to address them. Finally, and I think really importantly, it's been a year where we've made material progress in enhancing the quality of the wine range and our appeal to winemakers. I want to highlight a few things in particular on that point. Firstly, just a little color behind the way in which the proposition has resonated this year.
I think one really interesting angle to look to is the growth we've delivered in revenue per active Angel. In FY 2021, we took a material step up here and, you know, that wasn't surprising for a number of our members during lockdowns. There was a step up, there was excess purchasing effectively, and there were a lot fewer out-of-home wine consumption occasions, more in-home consumption occasions. The fact that we've been able to deliver a beat to that in FY 2022, I think really speaks to the continued momentum we have in terms of both the proposition itself and in particular, in terms of the range we're offering to our members. The fact we restored availability to our target range during the course of the year.
Candidly, we didn't expect to be able to repeat the 320 we deliver in FY 2021 and delighted to see us take a step forward in FY 2022 here. It's a great evidence that the underlying proposition really resonates. You can see that as well in terms of some of the recognition we've continued to receive. In particular, I'm delighted to see the recognition in awards that are voted for by members of the public. In both the U.K. and the U.S. recently, we've picked up awards as being the number one wine specialist proposition.
I think it's really important to talk about one of the challenging numbers in this year's results, which was the fact that at 1.5 x the level of payback we are projecting on our investments in FY 2022 in new customers is both below the levels we've achieved historically and below the levels that we target to deliver. I've talked a number of times in the past about a Goldilocks range for this, which will be somewhere in between 1.75x and 2.25 x payback. Too high a payback, and we're probably failing to deploy enough investment. Too low a payback, we're not creating sufficient value at each investment. There are a couple of reasons, and Shawn talks of these in his section, as to why we fell below that historic level of payback.
One of them is somewhat exceptional. We saw negative movement in our peak contribution margin year over year this year. If you zoom back out and look at the trend, we've got a long and consistent record of being able to expand the peak contribution margin, and I believe over the medium term, we will return to doing that. However, in the way our models work, we conservatively project forward the margin rate we're at, and that is having an impact on the payback level we're projecting currently. I think it's really important that we don't hide behind that as the only reason. I think even without that, you know, we would have been at best at the bottom end of that Goldilocks range, maybe slightly below.
We have seen some pressure in terms of marketing cost inflation, and in particular, in the first half of the year, we were not fast enough to respond to changes in consumer behavior as customers exited lockdown. Consequently, we paid more than we should to some customers. One of the things that's really important is that we have taken action to correct that. As we exited the second half of the year, and in particular in the fourth quarter, we saw payback levels returning to that Goldilocks range, led by strengthening performance in our U.S. market, which is particularly important. I'm gonna talk a little bit more about some of the tactics we're deploying to drive that improvement in a second.
I think if you wanted to take a step back and think about the types of levers we're using and the way in which we think about managing our growth investment, and how that varies across market, I think that's also helpful. In the U.K. in particular, we think our market positioning is an important lever or an important thing we need to review in order to make sure we're delivering both good payback now and the prospect of continued and sustainable growth in that market. What's happened over the course of the last 18 months is that we have maintained price points, for longer than a number of our competitors. One of the challenges that's led to is actually in the U.K. market, we found ourselves as the lowest priced online wine specialist proposition.
That attracted a group of customers into the business who were overly price sensitive or price-led. That's difficult, because it's hard to monetize those customers on an ongoing basis, and you tend to see much higher levels of churn. Shawn talked about in his section. We're taking active steps and indeed have already taken steps in the U.K. to correct that, to move the business back to what I think is its right positioning, showcasing the world-class wine we're producing from great independent winemakers and attracting customers who are looking for, yes, great value for money, better wine than you get elsewhere, but are not an absolute price-led customers. You'll see that flow through into the balance of spend or investment between media, paying money to third parties, could be Facebook, could be a partner who's inserting our vouchers, versus first order losses.
Put a different way, you'll see an improvement in the margin we generate on new orders in the year ahead. One other really important lever we've got, one that is controllable, is choosing to redeploy some money that historically we've spent as marketing dollars into investing in the early customer experience. I think we have an opportunity to create real leverage or improvement in our cohort economics by deploying more resource and more focus against translating customers from traffic to initial trial, but then really in focusing on the quality of our first 90 days. I'm gonna talk about that initiative in a second. Now, over time, it's important to put these results into context. Typically, as you'll see, we tend to generate a higher five-year payback in reality than we initially project.
You'll see returns across each of the last five years, FY 2017 through 2021, actually sit materially above our Goldilocks range. You know, we do have, you know, good reason to believe, no reason to believe we won't see a similar kind of evolution on the FY 2022 cohort. Turning to the next theme around the winemaker appeal and the strength of our wine range. I'm really delighted to see a number of improvements here, not least because these are often the dividends of work that we have done over multiple years in partnership with our winemakers. Today, we're working with 266 winemakers around the globe, an increase of 13%, including conversion of a number of winemakers we initially worked with as part of our COVID-19 relief wine fund. We've highlighted here the number of awards.
These are kind of top-tier international awards, things like the Decanter World Wine Awards and IWSC awards won by our U.S. range in the year. They increased by 721%, to 230. In fact, we took home over a quarter of the gold and platinum awards, for U.S. wines at this year's Decanter World Wine Awards. I'm delighted by this. I'm not surprised. We've always known we make great wine, but it's great to see our winemakers getting that important critical recognition. It's also helpful, to be honest, in terms of bringing new winemakers into the portfolio. It's translating through to enhanced quality perception, which as you know, is a key metric that we track. This says that even outside of our customer base, people are starting to understand the quality of wine we're producing.
All of that is also supported by us enabling our winemakers to build scale businesses. You see the number of brands that are achieving material sales within Naked, progressing, which I'm delighted to see. You can also see that just on a simple view in terms of total sales in the business per winemaker, which continue to increase. One area that we've talked about a lot is the opportunity to deliver improvements or opportunity to enhance the range and to explore more premium price points and offerings. Again, this isn't something you can do overnight if you want to work with winemakers to produce high quality products authentically from scratch. I think in the last year we've seen real evidence that our strategy is working and resonating.
In particular, in the U.S., you see a big jump in our key holiday quarter in the number of bottles of luxury wine, and that's wine sold at over a $25 price point in our terminology that we've delivered. With the number of bottles growing over 100%, there's clear evidence that as we produce these wines, there's real demand within our customer base. I'm delighted to see that. In Australia, you see the continuing growth in average order value, which is a result of the work to review the range and enhance the level of premium offerings that the team have been undertaking over a couple of years now. All of that means that we're able to unlock amazing talent into the business. I wanted to highlight one of my favorite stories from the year on the winemaking front.
Rudy von Strasser, who's a bit of a Napa institution, and he was one of the people who really single-handedly almost helped create the Diamond Mountain AVA in the valley, has chosen to bring his von Strasser brand exclusively to Naked. It's really exciting. It's a brand that's won Winery of the Year awards multiple times, you know, tons of great scores and accolades, and now to be exclusively available to Naked's members. Together with Rudy, we've already generated over $1 million of sales in his wines, and it gives us the type of brand that gives us an opportunity to stretch our price points. We sell his single vineyard cabs for around $50-$60. They're amazing wines and continue at that price point to offer great value. Something like the Sori Bricco, it's my personal favorite.
You should all get out there and buy it. I think it was over $100 when Rudy was selling through the three-tier system. Proof that the model works at premium price points. Turning now to our approach for FY 2023, I think it's important to give a little more context around how we're thinking about operating the business right now. Firstly, to think about some of the factors that go into that. You know, we have been spending a lot of time looking at the macroeconomic indicators to understand, you know, how best we should be operating the business right now. There are a few points that are important to draw out. Firstly, the wine category is a fairly recession resilient category. Typically, it's relatively volume inelastic, i.e., put simply, people drink similar amounts in good times and bad.
If you look at the U.S. and U.K. markets in particular, during the last major downturn, the global financial crisis, both continued to see growth during the course of that period. What mainly you see is consumers changing buying behavior, whether that's switching brands or switching price points. Equally, we know that Naked's model is resilient. In particular, you know, in the time that we operated a retail model in Majestic and the D2C model in Naked in the U.K., we saw that the Naked model was much more resilient when consumer confidence was challenged. And that's partly because of the nature of the continuity, the subscription element of the model. It's partly because of the high retention characteristics of the business and that emotional connection to exclusive product.
You see that in our high sales retention rates, you know, a net promoter score of over 60%, over 80% amongst long-tenured customers. Our customer base is also relatively well-positioned going into a period of economic uncertainty. It skews older, more affluent, has a high level of homeownership. There are a number of reasons why we see the business as well-positioned. I think it's really important to say that we are not in any way complacent. Whether you're looking at inflation rates or consumer confidence metrics, there are generational challenges in some of those numbers. We recognize those risks. Notwithstanding the fact that we think that the business and category is well- positioned, we think it's appropriate that we operate prudently in face of those. Taken together, that context informs our intended trading approach.
The first thing here, you know, obviously as responsible operators, is to make sure that we are positioned to endure whatever level and magnitude of downside risk you might look at. In light of that, Shawn talked about measures we've taken to reinforce our balance sheet, giving ourselves extra flexibility through negotiating an asset-backed lending facility and making sure that we continue to preserve and create space for us to look for opportunity as opposed to, you know, worry about having to, you know, manage through. On top of that, we continue to monitor extremely closely customer behavior at a market and cohort level to look for any early warning signs for changes in consumer behavior that might need for us to take further measures. The second thing is to make sure that we continue to reinforce our key differentiators.
I believe that some of the market context may well offer material opportunity for Naked. Put simply, in recessions, consumers often change the way in which they buy products and services. People are much more likely to switch brand, and that's exactly the behavior we need. You know, we're a 1% market share business with an extremely large $25 billion TAM. Our challenge is convincing people they ought to do something differently. We'll be looking for ways to amplify and share our message, and we'll be making sure that we continue to apply that customer first mindset and reinforce both the rational differentiation, better wine for your money, but also the emotional differentiation of the Naked proposition. Finally, I think it's important to say that we will continue to look for opportunities.
As consumer behavior changes, as I say, I think there may well be material opportunities for Naked. We will continue to invest based on a data-led approach, and we will seek to deploy investment into channels and markets where we see good evidence of returns. It's also, I believe, continues to be a good time for us to pursue our thesis around brand investment. I'm gonna talk more about that. I think at a time when more consumers are reviewing purchasing behavior and are open to switching, I think it's actually a great time to communicate why Naked's a different way and a better way to do wine. On that note, I want to turn to some commentary on our strategic growth initiatives. I think it's important to start off with re-articulating our philosophy here.
We want to grow this business, but we want to grow it in a way that is sustainable and responsible. At the heart of that means you've got to have really strong unit economics. As I said, we're not happy or satisfied at all with the payback measure we delivered in the year, and we believe we can restore that to our long-term Goldilocks range. That's, in our mind, a prerequisite of us growing the business responsibly. The best way to ensure you can ultimately deploy more investment and grow the business faster is to improve your underlying cohort economics. I want to talk about a couple of areas of particular focus for us in FY 2023. The first is the measures we believe that can help us better translate traffic we're generating into lifetime value.
Secondly, some measures that we believe can improve our repeat contribution economics. Obviously, lifetime value is lifetime revenue times contribution margin. In terms of our focus this year on improving the translation of traffic to LTV, there are three key initiatives as part of our FY 2023 strategic plan. The first of those is focused on enhancing the conversion rate, so getting more lifetime value out of the traffic we already generate. Here, we are investing to increase the size of our marketing product team that is focused on that across markets and pursuing hypotheses both around enhancing absolute conversion rate, things like increasing the number of payment options we offer to customers, empowered by implementation of a new payment processor, as well as looking at ways in which we correctly configure the right offer to the right customer.
Put a different way, we could also increase the lifetime value per unit of traffic if we dial back unnecessary discounting to customers that we don't want to incentivize as much. A second area of focus is increasing the number of new member adds that come from either winning back former members, or effectively remarketing to leads that don't convert first time around. I'll talk to you in a minute about some of the early signs of success we've seen in that area at the back end of fiscal year 20 22. Finally, I think we have a big opportunity in the first 90 days of our member experience. Honestly, on reflection and looking at the balance of resources we've deployed as a group, I think this is an area that we've got to acknowledge we've underinvested in.
In the year ahead, actually already, we've created a multidisciplinary team to focus exclusively on the first 90-day experience across our markets. We believe we have a material opportunity here to bridge from an introductory trial through to what becomes, as you can see from our sales retention rate, an extremely high retention model once customers get into the habit of making multiple purchases. Turning briefly to some of the hypotheses behind that thesis on improving the first 90-day experience. In particular, we believe that through a combination of better personalization of indeed the initial first case of wine to different customer groups, some targeted use of offers and incentives, and using our storytelling ability to better showcase our differentiation and the differentiation of the Naked model earlier on, we can materially enhance conversion from first to second order.
In doing so, we can achieve material leverage for our overall cohort returns. I told you that we've been experimenting, especially in the second half of the year, with our remarketing efforts. You can see here that we delivered material traction, enhancing the percentage of member adds coming from the win-back of former members, predominantly driven by efforts in the second half of the year. Indeed, that's a key part of the reason why in the fourth quarter we saw payback return to sit within that Goldilocks range. Looking forward, we believe there is much more to go at here, and that we have an opportunity to drive this percentage to at least a third, over the medium term. One of the great things about those types of efforts is it gives us another way to leverage our powerful proprietary machine learning models.
Taking a look to the right-hand side, because we choose which former members to target for reactivation and what offers to serve to them, we typically generate materially higher lifetime value actually on a reactivated member than in a first-time sign-up. Now, turning from the opportunity to better utilize traffic to repeat contribution. I think this is an area that we need to do a better job of explaining, our philosophy and the opportunities that we have. As you can see, over the long term, we've expanded repeat contribution margin continuously over the last six or seven years, and then that took a step back in FY 2022.
Looking forward, we believe there are a number of levers we're able to pull to address that and return to contribution margin expansion. Now, I've said a number of times, I don't believe in maximizing repeat contribution margin for the sake of it. I believe that a business is strongest and most competitively differentiated when we share the benefits our economics around with all our stakeholders. That said, it's really important that our margins are sufficient to enable us to invest confidently in acquiring customers and continue to grow and scale the business. With that in mind, in the year ahead, there are a number of actions we'll be taking. Firstly, as a vertically integrated production model, we have a lot of ability to determine the composition of our products.
Whether that's taking initiatives like our U.K. division have done to work hand in glove with winemakers to strip cost you can't taste out of products by lightweighting bottles, or working with our winemakers to deepen collective sourcing, pooling resources across more winemakers to combat price inflation, or redesigning the contents of products themselves and looking at the sourcing that goes into them. Secondly, we're a model that sells exclusive brands that are available only at Naked. I think this is really important. We know two things. One, we can show that we have a measurable quality advantage. Secondly, our products are not available anywhere else, which means our pricing decisions are entirely our own. They're not driven by others. That gives us an opportunity where we need to pass through price increases with limited impact on customer behavior.
You've seen that in our Australian division in the course of the last 12-18 months. The next thing to remember is because we have that measurable consumer surplus, in non-consultant speak, we're giving people better wine for their money. We do have some leeway and some opportunity to manage our promotional and our markdown and marketing investment to members, and we intend to do that. That's really supported by the ownership we have of our sales channels. 100% of our wine is sold on our website, on our app, and that gives us an opportunity to move nimbly to change the balance of the range and the mix and give us a number of additional levers if we think about the conversion of gross margin to contribution margin.
Now, to take that out of the abstract, I think the best thing to do is look at what we've been able to achieve in Australia. Really here we have the perfect playbook, which we'll be rolling through the U.K. and U.S. divisions in the year ahead. We've been able to add 4.5 percentage points to the contribution margin in Australia this year, done in the face of an inflationary operating environment and while maintaining really high levels of sales retention in that division. We know what we need to do, and we're working hard to implement that in the U.K. and the U.S., and you should expect to see progress on that in the course of the next financial year.
Finally, I want to turn and talk a little bit more about our marketing R&D investment, which this year is exclusively focused on furthering our hypotheses around the ability to scale Naked responsibly through investment in brand marketing. Now, to recap the thesis here, we believe that over the medium term, by having more people understand what Naked stands for and how it's differentiated, we will best be able to acquire the most high valuable customers and generate good returns on our marketing investment over the medium term. For our first decade and a bit of operation, we've been almost a 100% performance marketing business. I think to achieve the level of scale that is possible for the Naked model, we will need to move away from that.
Equally, we are a business that firmly believes in, you know, a testing-based culture and making decisions based on evidence and proof. The way we're exploring our brand opportunity is consistent with that. In the year just gone, we've learned a couple of important things. Most notably, in Australia, we've proven that we can cost-effectively change people's minds. We have invested above the line in content featuring our winemakers and driven key things like comprehension of the brand, quality perception, and trust. Equally, in looking at the tactics we've deployed there and some of the testing we've done in some regional U.S. markets, we've also seen that where we do that investment long, slow and consistently, we have better return than when we do that in a short, big bang focus. We're taking some of those things into our plan for FY 2023.
Now, the approach we have for the year ahead is gonna be different in each of our markets, recognizing their different phases of development. In particular, for our two largest markets, in the U.K., really, it's around brand activity that's supportive of our repositioning and making sure we're accentuating the quality of the winemakers we work with and the product we produce, and making sure that we are driving the right brand association. Put simply, lots of people know Naked in the U.K., but they don't really know that much about us. In the U.S., the market's at a different stage, and our activity is much more focused on educating consumers about the benefits of going direct to consumer in general, and the superior value that a direct model is able to offer.
In both those markets, we'll be deploying activity with clear control and test markets over a six-month period, which will enable us to do two things. It will give us accurate and measurable quantification of how much it costs to change people's minds and how much we can change them by. Secondly, it will be able to show for us, how does that investment then impact in turn on our performance marketing returns? As you can see from the right-hand side, I'm really excited that we will have meaningful testing over a half-year period where we look at a very different marketing mix. As an example, you know, our consumers in the U.K. who are in our test regions, we're seeing roughly a 50/50 mix of spend between direct response or performance marketing and brand marketing.
I think that will give us great insight to be able to build on, as to the future marketing mix that's most appropriate to deliver high-quality returns and growth for Naked. That's all the theory. I'm also very excited about the content we've produced. Obviously a lot of the returns you get from brand campaigns come down to the quality of that content. You've got a still here from our U.S. campaign, which is gonna be quite fun, a little provocative, and really directly talk to Americans about the reality of where your money goes to when you buy wine the traditional way in the U.S. That is that most of it, spoilers, is not going to the person who made the wine, but it reflects the cost of that wine moving through a number of intermediaries before it gets to you.
We're playfully bringing the middleman to life in some campaigns that are live as of now in our Denver and D.C. test markets. Finally, I want to talk a little bit about how we're thinking about making sure the business is able to scale efficiently. In the course of this year, we should see realization of benefits and deployment for a number of key infrastructure projects that we've been working on over the course of the last 12-18 months, including implementation of NetSuite, a new payments platform, which we're currently in the process of migrating to, and some improvements to our underlying data infrastructure to make our powerful data assets more available in the business and able to power microservices and different parts of the customer proposition.
These have been important investments, and one of the challenges of scaling the business rapidly over the course of the last two years has been the requirement for investment in our infrastructure has been greater. I'm really pleased with the progress we're making. I think it's also appropriate for us to consider how we set the organization in general in terms of how we set up for efficiency. As part of that, I've created a new role as part of our executive management team of Group Chief Operating Officer. Essentially, the mandate is for the how. We know what we need to bring to life for consumers and winemakers, and what we want to make sure we're doing is the way we do that, the way we operate as a team, is as efficient and as scalable as possible.
The person we've appointed into that role is an internal candidate, Alicia Kennedy, who a number of you may know. Formerly, she was the Managing Director of our Australian division. Some of the reasons that I think Alicia is perfect for this is the way in which she operated that business, operating with a very lean team, delivering a really impressive turnaround on key performance metrics over the course of the last two years, and building a really deep and ingrained understanding of the Naked culture.
I've been really excited to work with Alicia in the time that she's been enrolled since the end of 2022, and look forward to her being able to drive both the way in which we do work, but also setting the business up to enable us to deliver with more operating leverage over the course of the next two or three years. In summary, we have a really clear mission at Naked. I'm delighted that we are delivering on that mission at scale, and that in doing so, we are delivering real value and benefit for our winemakers and our consumers. The results we've delivered in FY 2022 demonstrate that proposition is resonating, and it's performing. For the year ahead, we have a clear focus on responsible growth. As we've guided, we'll operate the business broadly to an EBITDA neutral perspective.
We will be mindful of the overall economic and consumer outlook, but we will continue to take a balanced approach. Where we see good opportunity to invest and grow, we will absolutely take that. Over the long term, we have a compelling growth path. We have a large underpenetrated TAM and a genuinely disruptive business model that adds additional value for both winemakers and consumers, and backed by a long track record of strong proven unit economics. I'm really excited about taking that mission and showing it to more people and the prospects for Naked, both over the year ahead, but over the longer term as well. On that note, I wanna thank you very much, and we're gonna open up to Q&A.
Ladies and gentlemen, if you'd like to ask a question over the phone at this time, please signal by pressing star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Please press star one to ask a question. Hold for just a moment to have an opportunity to signal. We can now take our first question from Mark Borskey. Go ahead.
Oh, hi. Good morning, everyone. Just a couple of questions, please, around working capital and then also one on share-based payments, if that's all right. On working capital dynamics, can you just clarify whether you ring-fence Angel deposits at all to separate customer cash from company cash? It looks like customers are effectively funding working capital investment, with deferred income balance of GBP 76 million being, you know, quite a lot higher than the group cash balance of GBP 40 million. Then maybe could you just help give some guidance or perhaps a range for the working capital movement you expect in FY 2023, given the guidance assumptions out there. On the share-based payments, I just thought that GBP 4 million number was-
Mark. Should we answer your first two bits?
Sure.
And then-
Sure.
We'll do number three. It's still early in the States, and three-part questions might be beyond us. If I take the first bit, and then, Shawn, if you can talk to the expected movement. The way we approach this, we don't operate a dedicated ring-fence or kinda separated segregated account for those Angel funds. We put in place as a board a really clear treasury policy, which makes sure that we have sufficient funding in the group to cover any likely redemption of Angel funds. We build that cover.
We build that policy based on looking at historical behavior and then applying a multiplier to make sure that, you know, under any plausible circumstance, we've got plenty of cash available to meet any customer desire to take the funds back. Obviously, what you see from the business over the long term, with a very loyal customer base, very high rates of sales retention, is actually the outflow of that customer funds number tends to be very small. Obviously we think it's really important that we've got a robust process in place to give appropriate safeguard there. I'll let Shawn talk a little bit to the second part of your question.
Yeah, look, I think from a working capital perspective, you know, we just take a step back. We ended last year with a strong balance sheet. We had GBP 40 million of cash on the balance sheet, and inventory, importantly, of GBP 140 million. Importantly, also, I think during the year, we restocked following lower levels of inventory at the end of last year, when obviously we had our, you know, 70%, approximately 70%, growth year. I think it's important to think about, you know, all of these metrics together when looking at our balance sheet. Y ou know, the net of all that is we end up with, I think, a very healthy current ratio, if you look at the current assets and current liabilities, that we have on our balance sheet.
Thanks. That's helpful. I suppose what I'm getting to is the going concern uncertainties that you're flagging today. You know, if your auditors can't give you a completely clean opinion based on, you know, the working capital dynamics you've described, is that really the best model to fund the business?
Yeah. Happy to talk directly to that, Mark. I think the first thing that's important to say is, you know, the accounts are signed off on a going concern basis and the management team, you know, we're very confident that's the appropriate situation for them. In the real world, we've got a strong balance sheet going into the year with GBP 40 million of cash. As you see the business profitable in FY 2022, in terms of the main trading operations of the business, you know, it's been kind of positive or, you know, cash neutral over the course of the last two to three years. We've got a good amount of cash. Our operations don't burn through that cash.
Really what the flag raised in the audit process says is, if you apply a severe downside scenario, which, you know, it's important and prudent as part of audit work to do, and if we didn't choose to trade the business any different way, and we've got lots of levers we could pull, and if under that scenario, we no longer had access to any borrowing, then, you know, we could have. You know, that's where the disclosure comes from. I think, you know, that's two or three hypotheticals on top of each other. I think in the real world, we're confident about the level of funding we have in the business and that we have appropriate funding to deliver our plan.
Okay. Thank you. The last one was just on share-based payments. I think given all we've just talked about, that GBP 4 million number for the new financial year seems quite high. Is that just sort of technical based on your models, or is there anything you might say to that?
Yeah, I can cover that. You know, I think you know, we are excited about a new equity compensation program that the company is rolling out, which aligns the interest of employees with the creation of shareholder value. I think the important thing about that program is that it you know, there's no the dilution or real cost to shareholders absent an increase in the share price. That's because in the short term you know, the program includes the grant of stock options. If the stock price doesn't go up, then then there's no cost there.
You know, the accounting requirements behind that, you know, require a share-based compensation expense irrespective of what actually happens after the shares are granted. You see that just flowing through there. I think the key for us is that program very closely aligns creation of shareholder value with actual equity value being shared with our employee base.
Got it. Thank you.
We can now take our next question. Go ahead.
Hi, guys. I had a couple. Starting with, you mentioned that you are continuously monitoring if there are any changes in consumer behavior. Maybe if you could give us some idea on what you have seen in the first quarter of the year. Have you seen any changes in any of the three geographies? Especially in context of the statement, I think that was mentioned in the going concern statement that you are currently running behind your forecast so far this year. That's the first, and I'll come back to the second later.
Yeah, happy to talk to that. We monitor, you know, a number of different variables, but primarily we're looking at human behavior. We look at purchase rates, activation, Angel, and retention rates. You know, basically, are people buying and are they maintaining their membership and making their monthly payments? I think there's, you know, nothing particularly unusual in the long-term trend to call out, and that's why we've not made any particular disclosure here. I think it's fair to say that at the beginning of the financial year, and in particular sort of, you know, around end of March, early April, in both the U.S. and the U.K., we saw a few weeks of elevated cancellation.
I think really tightly coinciding with, you know, the world being a pretty scary place and the Russian invasion in Ukraine. In the U.S., you know, that's flowing through very directly to people feeling the pinch at the gas pump, which is, you know, a really obvious barometer of inflation for folks. We see overall, you know, very much in line with long-term trends there. Consistent with, I think, the picture you see in the disclosure for FY 2022, where revenue per active Angel actually is the highest we've ever delivered. Nothing, you know, nothing exceptional to flag there. I think in terms of, you know, where we were versus expectations the first couple of months of the year, nothing beyond kind of normal variance around the plan, you know, we had.
There's nothing exceptional to kind of call out there. As I say, you know, it's a case of Deloitte really just prudently doing their work as auditors and saying, you know, "We should apply some severe downside tests." That's, you know, an appropriate thing to do at a time where obviously there is a degree of macroeconomic uncertainty. I think ultimately Naked is well- positioned to look for opportunity in that type of environment. I, you know, obviously, you know, no one enjoys going and, you know, going through the technical process of audit review, but in the real-world context, you know, I feel very confident about where Naked is and the fact that we're well- positioned to deliver on, you know, a year of looking for responsible growth.
Great. Thank you. That was very helpful. You talked about consumer behavior changes during tough times, and maybe just your thoughts on whether you think consumer behavior regarding subscriptions would change in these tough times, and maybe people go for more individual bottles, even if they are priced higher than what your bottles are, but because they're not going to sign up for a subscription or a bulk payment every three months or every four months. Is that a possibility? Do you think that kind of behavior exists, could potentially exist in the next couple of years? Thank you.
Look, I wanna start off by being honest about what we do and don't know. When you look at the current prevailing inflation rate in the U.K. and the U.S. in particular, consumer confidence in the U.S., you know, they're generational high and a generational low. So I obviously have no direct experience of exactly that. But what we do know really well is in the time we traded a subscription-based business, Naked, and a bricks-and-mortar traditional retailing business, Majestic, side by side in the U.K. market, the Naked business was much more stable and predictable at times when consumer confidence was challenged. You know, think about things like the time of disruption around the Brexit vote in 2016. To me, that showed a couple of things.
One, that the model we've got with the continuity relationship and allowing customers to build up money to spend progressively actually makes it easier for customers to continue making purchases when there's uncertainty. The second thing was it's a model that people are emotionally engaged in. It's not just a, you know, dollar for dollar value for value equation. Yes, we make great wine, and the value for money is amazing, but people also become loyal to their favorite winemaker and that product exclusively available at Naked. I mean, you see that in our high sales retention rate. You see it in a business that generates a net promoter score of 60%, you know, getting up to about 80% amongst longer tenure customers.
You know, those are things that position us, I think, very well, and mean that, you know, we've got a good chance of being able to focus on some of the upside, which is, yeah, you know, when times are tougher, you know, every bit of long-term research ever done shows that is when there is more consumer switching. And that's exactly what we want to drive, right? We're a 1% market share business. We've got a large TAM, and I think we've got a differentiated proposition. You know, we need to run the business prudently, mindful that there is risk and there is a degree of uncertainty. Equally, you know, we founded this company in 2008, and I'm very confident that we can find some good opportunity in the year ahead.
Thank you so much.
Reminder, it is star one if you do wish to ask a question. We can take our next question now from Andrew Wade of Jefferies. Please go ahead.
Hi there, guys. Couple of questions from me. The first one, you sort of talked to a 1.75x-2.25x five-year payback as being a sort of Goldilocks range. Is that your expectation that you will fall in that range in the year ahead? That's the target, that's the plan. Is that what we should be sort of measuring the outcome versus?
I think we've talked about that range in the past. We've also talked about it with a spread around 4x when we had a lifetime 20-year payback metric, right?
Yeah.
The reason we get there, right, is that we sit down on an annual basis, and we look at the realized returns on a cohort. We do all the discounted cash flow analysis. You weigh in the overhead we're carrying and how we expect that to scale, and you make sure that the money you're investing is delivering an attractive IRR, so those investments make sense, right? That, that's how we generate that range. Which is, I think I mean to say that a 1.75x-2.25x might not be the right range you get to a DCF analysis forever in eternity, but I think it's definitely the right range for us to think about in the year ahead.
You'll see in our biggest market where we invest the most, in the U.S., you know, we comment in the materials that we moved back into that range in the final quarter of FY 2022. It's certainly our intent to, you know, to look to deliver payback across the group in that range in FY 2023.
Excellent. Thank you. Very clear. Next one, you know, you sort of talked to the not too distant past, that sort of 20% revenue aspiration. Is that still. It's not mentioned in the statement now. Is that still the sort of aspiration? Is there another aspiration which you have now and, you know, how are you thinking about that sort of medium-term growth target?
Look, I think a couple of things that's important to have on the record, right? You know, we've always believed in operating the business on a rational basis and kinda guiding the decisions we take based on the data we see, and making sure, you know, where we're delivering growth, we're delivering growth that's creating a lot of value, as opposed to chasing a growth number for the sake of it. I think the second one is, you know, the context is a little different from a year ago and, you know, anyone looking around the world at any of the kinda macroeconomic indicators, consumer confidence or outlook, and it's important that we recognize that as well.
That, you know, we have a degree of flexibility on what we expect from the business, and take a long-term perspective on how we best make sure that Naked is here in 10 years' time, is materially larger than it is today, and continues to create great value for our consumers and our winemakers. The second bit I think goes a little to mechanics. You know, we invested a little less than we hoped last year, and our guidance this year, you know, doesn't have us stepping up that investment materially. Evidently, that does have a knock-on effect on the rates of growth that we would generate in the short to, you know, short-term.
I think the short version of saying, you know, the right implication of today is that, you know, the near-term growth trajectory at a headline level will be a little lower. I don't think it changes our philosophical view that we have a large TAM, we have a clearly differentiated model, and we've got a decade of proving that we can generate attractive unit economics behind that. And you put all those things together, I think this business should and can, and will, be much larger, if you take a kind of five-year view. The reality is, you know, unlikely ever to get there in a straight line. What we're really focused on in the year ahead, as I think we're pretty clear in the presentation today, is making sure we're striking a responsible balance.
You know, we'll continue to look for growth opportunities as long as the unit economics are right. If there's a period of time when consumer sentiment's tougher and we need to run the business and it's flat for a year, and then we get back to that growth trajectory, then we're very willing to do that. I think that's the right and responsible approach to take with a long-term perspective.
Yeah, agreed. I mean, I guess if you're gonna be looking to accelerate growth into a sort of double-digit territory, wherever it's going to be, there needs to be, one, a return to stronger payback metrics, and two, return to stronger payback metrics at a substantially larger level of new customer investment as well. I guess the question is, what gives you confidence that at a higher level of new customer investment, you can still achieve those paybacks? 'Cause it is unproven still, isn't it? I mean, the biggest absolute pound note spend you've made, and made the COVID times notwithstanding is a, you know, sort of GBP 20 million-GBP 25 million.
Admittedly, that was quite a few years ago, and the proposition's moved on since then. I guess what gives you the confidence that you can spend GBP 50 million or whatever the number's gonna be to accelerate back to double-digit growth and still get the paybacks that you need?
It's a shame we're not face to face, but I'm chuckling a little bit. You know, I guess that's one of the great perfect counterfactual questions, right? I mean, for all points in growing businesses, you know, whether or not you can scale beyond the point you've got to is to some extent unproven, right? That's, I think.
Yeah.
Been the number one question that people have asked of Naked. You know, when I first got involved in the business, we were investing about GBP 7 million a year. People used to ask Rowan, "You know, surely you've found all the people who are interested in this weird angel proposition thing you've got. So your numbers look good now, but surely you're never gonna be able to do any more." Look, I don't mean to be glib, right? Evidently, you know, the combined challenge of improving returns and doing it at greater scale, you know, is a real one. I mean, the way we break it down is, say you want to have multiple tactics that can deliver that outcome and not be reliant on the success of any single one.
I mean, what you hear us talking to in the results today is a concerted set of measures that we're really confident give us an ability to improve our underlying unit economics. You know, you hear us talking to initiatives to reduce our cost of acquisition through an increased focus on remarketing and reactivation of former members, and through improving and making more selective our conversion rate experience. We are talking about ways to improve our lifetime value of those members, and in particular, highlighting the changes we're making organizationally to better align around the early part of the customer experience, which I think, if we're honest, has probably been an element that has let us down slightly. In strengthening our repeat contribution economics. You know, lifetime value is lifetime revenue times contribution margin. So that's obviously important as well.
I think those four things taken together, you know, we have a lot of confidence that in aggregate, that can drive our lifetime value. That's the best way to grow any business like ours responsibly. You take initiatives that mean you generate more lifetime value for each, basically, visitor you get to your website. If you do that gives you the best chance of consistently deploying more growth capital, acquiring customers at attractive economics. You know, that's what we're working on. Beyond that, we also do talk to the brand marketing hypothesis.
I think that's really important because you don't see a lot of examples of businesses that have got to where we are today, you know, GBP 350 million category leader, that then go and take the next step of scaling without diversifying away from a pure performance marketing mix. I think that's another thing that's important to bear in mind, right? You know, the journey from, say, investing GBP 7 million to GBP 40 million a year, and then the journey from GBP 40 million to, say, GBP 60 million, GBP 80 million, GBP 100 million a year at some point in the future. You know, the constituent parts of that may indeed are likely to look different. It's not a case of having to do more of exactly the same as we've done in the past.
Okay. That's some helpful color. Thanks, Nick. Then finally, really brief one. I wasn't sure I got the exact gist of where the working capital bit. Are we expecting a working capital inflow or outflow this year, assuming everything goes to plan?
I think the very simple boiling that down, we're saying we would expect a moderate outflow, primarily as inventory levels rise a little, but materially less than they did last year.
Yeah. Excellent. That's what I thought. Great. Thank you.
We can now take our next question from Ben Hunt of Investec. Please go ahead.
Oh, hi there. I just had a question on the guidance because obviously you talk of consistently having your sales retention, repeat sales retention at 80% across H1 and H2, which points to obviously a healthy proposition. When I look at the guidance and you are sort of pointing to GBP 83 million-GBP 93 million of repeat contribution. I think, okay, well, if you do GBP 40 million of investment in new customers and supposing you do not get a terribly good return on that, it speaks of if you like the retention falling quite dramatically or your expectation that it will do this year. I wanted to know whether that was more a function of because you believe the sales retention is going to be worse off this year, or more because the there are inflation pressures in marketing and logistics?
Yeah, I can cover that one. So look, I think one of the you know, really wonderful things about this business is the high retention rate of our customers. You can directly link that to the proposition, the strong consumer proposition that you know, is continually reinforced by the wine maker proposition. You know, very simply, you know, the wine is good and the customers are really enjoying what we're providing, and that would lead to that really high sales retention. In fiscal year 2022, the sales retention was 80%. That was a great result for us, especially because it was 88% in the prior year.
You know, during COVID in particular, people were you know, at home and ordering more frequently, which set up a tough comp for fiscal year 2022. 80% was a good result, and above our expectations, for that year. I think what that highlights is you know, the robust nature of the repeat customer base and the loyalty that we have from our customers. You know, I think as we highlighted in the guidance and as Nick said today, our guidance also is cognizant of the fact that you know, there's a geopolitical environment, you know, wars. There's you know, inflation, gas prices, and things of that nature. You know, that's what you see. We've reflected in our guidance, you know, that we gave today.
Okay. I mean, sorry to be candid, but are you sort of assuming in your internal forecast that sales retention comes back, I don't know, 7%-70% this year? Or is that a bit too harsh?
I think what Shawn's getting at, right, is there's a pretty wide range on there which reflects there's a degree of uncertainty. You know, we don't assume that sales retention comes down a lot, but equally, we haven't traded the business with inflation at 11% and consumer confidence in the U.S. where it is. It's important that we, you know, have put a range around that guidance.
Okay, fine. Second question, which is more sort of broad question, but I mean, there seems to be a lot of costs going into the business in general admin and marketing, R&D. It feels like obviously you know you're to some extent needing to improve the contribution margins by way of either increasing pricing, you know, changing the range around and getting sourcing benefits with your winemakers, and perhaps even doing some brand marketing. To some extent, it feels a bit churlish to say, maybe downgrading the or devaluing the proposition. Clearly previous management were always pretty religious about the way you know the value proposition that Naked gave.
I mean, I suppose my question is, a long way of asking it, is how far are you prepared to perhaps downgrade the proposition in order to maintain a sensible margin of this business? Are you finding that there's just more and more costs that you're having to invest into and therefore that you've got to somehow start, you know, going up the price scale or, you know, using more brand marketing or finding more sourcing really? Sorry, it's a bit of a long-winded way of asking it.
Maybe I'll give you a short answer, like not an inch. Look, you know, making sure we deliver for our customers, our winemakers, is the reason we exist as a business. I think it's really, really important to disaggregate two things. A belief in sharing the benefits or economics as we scale and making sure we consistently deliver value for all our stakeholders is not the same thing as a belief that your prices are gonna be the same in 1990, 2020, and 2030, right? Where the real cost of doing business, be they direct cost of production or cost of getting product to consumers move. Number one, you know, we look to use our scale to mitigate those as effectively as we can. Number two, you know, we do need to pass those through.
If you look at, this is something we spend a lot of time looking at, you know, the relative value we're offering to consumers, that's not being degraded, right? It's not like the alternatives for consumers are a set of products which are becoming cheaper and cheaper, right? I think it's really important that, you know, we, you know, I'm not someone who kind of would be willing to sacrifice the, you know, that part of the consumer experience. I guess, on that note, you can say I share the same religious persuasion as former management.
Okay, great. Thanks.
We can now take our next question from Charlotte Barry of Berenberg. Please go ahead.
Hi, Nick. Hi, Shawn. My question was actually on paybacks and kind of having confidence in them going forward, which you've already answered in a couple of the questions so far. Another shorter question. I'm just wondering, with this strategy to move towards a slightly more premium positioning and also your experience this year of acquiring what seem to be sort of less desirable customers, do you think there should be any reassessment of the size of the TAM that you're looking at going forward?
I don't think so. I mean, if you look at the way we've composed that $25 billion TAM, you know, the U.K. is a relatively moderate component of that overall addressable market. I don't think anything we've learned in the U.K. really changes that. I think probably what has happened is because, referencing our last question, maybe we held our price points too long. We may have attracted some consumers that we never really counted in our TAM in the first place. We may have seen some results from acquiring those consumers that suggest we were right never to have had them in the TAM in the first place either.
Okay. Thank you. Yeah. Yeah. Thank you.
We have no further questions over the phone at this time. I'll hand over to Nick and Shawn for web questions.
Okay. We're not on my slide here. Are we gonna read them for each other, Shawn?
Yeah. That sounds great. I will start. Looks like the first one on the list here is maybe for you, Nick. Are you still seeing improvement in current year 2022 retention of mature Angel customers? And is the revenue per mature Angel still on an upward trajectory?
Yes. I think Jason submitted this one. The disclosure we've got in the pack, I think it's page 26, shows the trend in terms of revenue for active Angel. We received a bit of feedback and, you know, we'd shown this on a per mature Angel in our last disclosure, and a few people said, "Hey, you know, your customer metric disclosure is an active Angel disclosure," and a mature Angel was an older metric we'd use. We'd just like to tidy this up. You've got that data available in the presentation. The two things are incredibly highly correlated. That's your answer for that one. Okay, we've got a two-parter from Andrea, which therefore is gonna challenge who's gonna read what.
Shawn , I'll start with one for you. Can you elaborate on the property sale of GBP 5 million? Is it a sale and leaseback? If so, where is it in the P&L?
Yeah. After the end of the year, I think what Andrea is referring to, you know, we sold a property that we had in London. That property was a holdover from when we were part of, you know, the Majestic Wine Group. It was a non-core asset that was just, you know, held on our balance sheet. You know, we received a good offer for it, and so we agreed to sell it. The transaction closed after the end of the fiscal year. It's not a sale-leaseback. As I said, it's a non-core asset, and not something we were actually utilizing. Yeah. It'll flow through the P&L in FY 2023 as a gain on sale of an asset.
Perfect. Do you wanna give me part one?
With the high retention you have seen in Australia, despite price increases, what is holding you back with price increases in other countries to restore margins?
Yeah, Andrea, I think there's always a balancing act here, right? You know, we wanted to, you know, do a couple of things. Firstly, you know, it's never our first instinct to take price, and we looked to take other measures to offset that, to find efficiency within our business. Secondly, I think it was important and useful for us as a group to take advantage of the opportunity we have to deploy things in a sequential way, and actually using our Australian market to validate an approach to reviewing the range, identifying where there was opportunity to take price while maintaining that overall value for money equation for Angels and validate that we could do that without harm to the overall, you know, economics of the business.
It's very much our intent now to take that as a playbook and roll that through. You know, that action is underway in both the U.K. and the U.S. I don't think there is a lot of extra things to wait for. Really looking to just take a, you know, a balanced approach, and make sure that we're not, you know, rushing into something that we then, you know, came to regret.
Okay. We have a next question here, Nick. It looks like it's for you. Congratulations on the development of the business so far. I think the high retention shows how beneficial the economics of the business model are for all stakeholders. Some questions. How do you think about sheer scale? First question. Second question, do you consider lowering the monthly Angel contribution with growing scale? Third question, or do you think the high monthly contribution is important for strategic reasons?
Yeah. A few different things in there, and I've talked this concept in the presentation of, you know, how we balance off, you know, our philosophical belief that sharing the benefits of scale with all our stakeholders is the best way to create long-term value, with responding to, you know, high levels of inflationary pressure in parts of our supply chain. Ultimately, I think we have an opportunity to strike a balance there and that we have an opportunity to, you know, to make sure our economics are strong and sustainable. Ultimately, the right repeat contribution margin for the group is probably the lowest one that allows us to invest in acquiring customers at scale and deliver attractive returns. You know, that's how I think about it, ultimately.
On the detail here around the Angel contribution amount, this is exactly the kind of thing in our business that we consider perfect for an iterative test and learn approach. I don't think there's a single philosophical answer as to the right Angel contribution. It's the kind of thing that we do in reality and in practice, kinda test relatively frequently, and optimize the results to that.
Great. Looks like the next one might be for me. I might just read it to myself. At what point?
I can read it for you if you like, Brad. So sorry. The question from Brad, which says, "Your financial filing raised some uncertainty about Naked as a going concern. Specifically, it noted the potential for capital raises in the fourth quarter and a potential for a covenant breach, were there to be a decline in repeat contribution. Can you talk about the sustainability of Naked's balance sheet?
Happy to. Look, I think, as we mentioned earlier, we ended the year with a strong balance sheet, GBP 40 million of cash. I think really importantly, GBP 140 million of really fantastic wine that we earn a great contribution margin on. We added the credit facility after the end of the fiscal year. You know, we thought it was strategically good to have increased liquidity. We added the credit facility. It allows us to borrow against our U.S.-based inventory. I think as we talked about, the base case forecast shows that we have sufficient liquidity for FY 2023.
You know, on top of that, we talked about expecting to manage the business to a breakeven adjusted EBITDA, which is something that we is also explicit in the guidance that we provided today. I think, you know, as we talked about, you know, the technical point here I think that's being made is, there's, you know, a number of confluence of, you know, ifs, if then statements, that would get to that. You know, if the performance was worse than expected, you know, if we didn't trade the business differently as a result of that, if we didn't do anything additional to conserve cash, you know, in that case, we're reliant on the loan. Like most credit facilities, you know, there are financial covenants in the credit facility. Yeah.
Yeah. I think that's important. Look, I think it's a really important issue for, you know, us to spend a bit of time reflecting on because I know it will attract, you know, kind of questions. I'm sure lots of people on the call have got questions. I think, look, you know, things we're being clear about here are, you know, number one, we don't have a plan that is reliant on us using external borrowing, but we thought it was prudent to put a little bit more flexibility into the balance sheet. Number two, we don't think we're gonna have any problems with the covenant on that loan. Under a downside scenario, we could have problems. You know, that's the technical point that's being raised.
Directly to your point, Brad, you know, we're not stating or guiding here that there's a likelihood or an intent of us, the management team, to raise capital in the fourth quarter. Merely what our auditors are saying is, were there to be a severe deterioration in the business and were we not to take measures to address that and were we not to have recourse to this loan, then, you know, we would have a requirement for capital. I think another way of thinking about it really simply is not only did the business generate profit last year, but you see it generates materially higher levels of standstill profitability. What that shows is we have a lot of choices in this business. We can get to a number of different P&L outlooks at the end of the year.
We could deliver materially higher short-term profitability, you know, were we so minded, or if we needed to. There's a lot of optionality in the business. There's a lot of discretionary expense, whether that's discretionary marketing expense, or SG&A expense that we could unwind out of the business were it to be necessary. I think that's really important.
You know, ultimately what we've got here is a technical challenge which says, "Hey, you know, if you layer a few hypotheticals on top of each other and you don't change your actions, then you have some requirements." Be very clear, like, were we to see, you know, materially deteriorating consumer behavior and were that to impact our generation of contribution in the way it's highlighted in a severe downside scenario, we would trade the business differently such that we wouldn't have this requirement. So yeah. I think it's important to spend a bit of time on that. Thank you very much for the question, Brad.
The flip side of this, a couple of people have asked kind of questions, obviously, with a different share price around potential for share buybacks. The question here is, at what point, if any, would a buyback program be considered as a good use of available free cash flow, Shawn?
Yeah. Maybe I can talk about the philosophy and how we approach capital allocation. I know this is something, you know, we've had disclosure on, but I think it's important to address. I think the first point to make is that our philosophy is predicated on maintaining sufficient cash to operate the business and also, you know, given the seasonality of our purchasing cycle and a little bit of sales seasonality with, you know, the holiday quarter. You know, our approach is to allocate capital to growth investments that deliver returns in excess of our internal hurdle rate.
You know, any potential excess capital that we have, you know, above the amount that's needed to run the business and invest in growth, is, you know, our philosophy is to return that to shareholders. You know, given the levels that we're at today, you know, we don't anticipate any returns of excess capital to shareholders in fiscal year 2023, at this time. It looks like the next one, Nick, might be for you, so let me read that one. iOS updates have affected mobile marketing, and a lot of concerns have been raised around the payback economics of your Angels. That drop in Angels payback is permanent, and historical payback will never be reached again.
My first question is, apart from TV ads and banners, which take a longer approach, can you give out other examples of new marketing initiatives or strategies that demonstrate the company's ability to revive its Angel payback? Secondly, what is your long-term target for repeat customer retention? Please give examples of initiatives that is improving that metric.
Yeah. Owen, I think to reinforce some of the things I said in Q&A live Q&A from analysts. You know, we don't believe that there's a permanent degradation of our payback, and we believe there are a number of levers we can pull to address that. I think beyond that, we see evidence from that, from payback increase in the second half of the year, and it returning to our Goldilocks range in our key U.S. market in the final quarter. In terms of the strategic focus this year, very much about strengthening our cohort economics and our unit economics at a cohort level in order to allow us to deploy more capital with confidence and not be reliant on, you know, movements in kind of marketing cost, which we can't control.
Directly, I think to reinforce what I've already said, there's a couple of things that focus on reducing our cost to acquire a member. One of those is increasing the extent to which we target the remarketing to leads we've already generated and reactivation of former members. You see that getting really good traction in the business, in particular towards the end of our second half. I think in the past, we show that 17% of members acquired in the fiscal came from reactivation of former members, and that we believe we can materially increase that in the year ahead.
We've also increased resource dedicated to improving the conversion rate experience, and one of the major technology projects we'll be landing in this year, for example, will be a new payments processing platform, which will support that and able to enhance our checkout and payment experience. Secondly, we think once we've got customers to try the wine, we can do a better job of getting them into the habit of being loyal customers. You know, as you've always seen at Naked, we have a very high retention rate once customers get into that purchasing rhythm, but there is an opportunity to better convert trial to second purchase. Being honest, I think we've missed a trick in never having brought together a cross-functional team with exclusive focus on that. That's something we're doing this year.
Finally, I think there's a lot of stuff we can do to drive lifetime value, which is, you know, half of the payback equation through strengthening the contribution economics of the business. You see over the medium term, you know, that repeat contribution margin has moved from the low through the mid to the kinda high 20% at a group level, but took an unusual step back this year as we faced some exceptional cost pressure. What we talked about at a bit of length in this presentation is steps we're taking to turn that trajectory back onto its long-term trend. And again, that's a really great way for us to expand lifetime value, better convert lifetime revenue into contribution. I think all of those things give us a lot of confidence that we can, you know, pull those levers.
We don't need all four to be totally successful for us to materially enhance the return we generate. On the second point, in terms of long-term sales retention and Angel retention rates, you know, we don't have an explicit long-term target, but I think it's helpful to point out that the level we're at at the moment, I think for a non-software as a service business, getting sales retention rates consistently in the 80s% is very differentiating. Maintaining that very much enables us to meet our guidance we've given of building the business as it matures to deliver a 10%+ EBIT margin. We will always work hard to make that number higher, but, you know, equally, if you know, it's a number that supports our long-term aspirations where it is today.
Naturally, I think you see it from our cohort chart disclosure, to the extent that the average age of cohort increases in the business, there's a bit of a mathematical sense that number will drift up over time.
Great. Next one here, Nick. Why aren't more U.S. consumers embracing your value proposition, which, given the U.S.'s three-tier system, appears very compelling?
Look, I agree. It's very compelling. Look, that's the challenge for us, right, is to make sure that customers understand the point of differentiation that Naked offers. Worth saying that in 10 years of operating in the U.S. market, we've built a business with 1% market share. We are the seventeenth largest winery in the USA, and we've built the largest pure D2C wine business in America and in the world. I think we've achieved a lot. Absolutely, we want that business to be much better known and understood.
That's a key part of the reason why even in a challenging time, I think it's exactly right and appropriate for us to be investing money through our marketing R&D line in building out our brand marketing capability and ultimately trying to drive more awareness, but in particular, comprehension of what we do. I think as people understand that there's an alternative to the three-tier system, and we help educate customers as to what the ultimate downside there are as a consumer of the way wine is typically made and sold in the USA, then I think there is an opportunity to you know to materially enhance growth and bring a new wave of customers into the business. I guess the short answer is we're working hard at that.
That's the job at hand, and that's the path that we believe over time will let us materially scale the business in the U.S..
Okay. Next one here, Nick. You've guided to no growth and no profit current financial year, so customer attrition is too high and our new Angel acquisition too costly. How are you gonna change that in the future, and get back to a 20% annual growth rate?
I think here, you know, the answer has got a lot of commonality with some of the things we've talked to before. You know, the best route to accelerating growth is improving your unit economics. I think I've talked pretty clearly to the kinda four major initiatives we're focused on this year to do that. Maybe a couple of other things to draw out. I think it's interesting to look at our Australian division, 'cause we talked on the call today about some repositioning of the business in the U.K., and I think that's very similar to some activity we undertook over the course of the last two years in Australia.
You see the dividends of that with our Australian business in much better shape and you know returning to stronger growth with you know enhanced economic strength and margins. You know, we kinda understand the work that we have here to do. We've got a playbook for a lot of this stuff that I think we can move through. Confident that we are gonna be able to make good progress. There are obviously things that are outside of our control in terms of what exactly the consumer environment looks like over the course of the next 12 months, but I think there's plenty here that we can control, and that's what we'll be focused on. A question for you, Shawn, from Alex, which says, "In terms of guidance around operating the business at a adjusted EBITDA level to break even, why exclude share-based compensation, if it's a real cost?
Yeah, sure. I think the adjusted EBITDA, what it shows you is, you know, it gets a little bit closer to the cash basis. I think that's our intention was to, you know, trade the business even on a cash basis in fiscal year 2023. I think as we talked about today, you know, we have a very loyal customer base with a value proposition that's really resonating with our customers. That results in repeat contribution profit and ultimately cash flow, you know, that we reinvest back into, you know, our SG&A cost base as well as into our future growth. We're cognizant, as we talked about, of the environment and the market. You know, we're cognizant, as we talked about, of the environment and the market. You know, we just talked about trading the business even on a cash basis, and adjusted EBITDA is the closest metric to that.
All right. I think we've got time for one more question.
Is a 1.5x five-year payback lower than your internal hurdle? How much of the drop in payback is caused by the privacy setting changes in various operating systems? What's the longer term payback customers you expect?
Yeah. I think to restate what I talked about in the live Q&A, you know, the way we operate the business, you know, in terms of deployment of growth marketing, is to look to maximize investment within what we describe as our Goldilocks range of a return of 1.75x-2.25x. The way we set that range is through doing a thorough annual process where we look at the real return on a cohort level using a bunch of discounted cash flow analysis and including allocation of all overhead associated in the business. That's how we set that range. As you can see from that, I'm not gonna get into specifying our internal hurdle rates, but we'll be transparent. 1.5 times is below what we would seek to deliver.
I think, again, you know, in a year where you had more normal progression of your contribution margin, we'd probably been pretty close to the bottom end of that range, but not gonna make any excuses. You know, we would have liked to have done better. In terms of, you know, how much of that is directly attributable to one single thing, I think we talked quite extensively at the half year that there were some challenges posed to us in terms of the impact of privacy changes. I think you see in our disclosure today that our return on first half cohorts was weaker than our return on second half cohorts as we've adapted the way we market in the business to that environment. But I don't think. Again, don't want to make that a single excuse.
You know, Facebook has never been, for example, our biggest marketing channel. There are plenty of other ways we can acquire customers. Very much for us, the focus is on making sure that we are doing the things we can do to control the amount of lifetime value we're generating from the traffic that comes to us, and using that to enhance our cohort economics and deliver better returns, which enable us to deliver sustainable growth. I think on the flip side, though, you know, ultimately, you know, a bit like reviewing a coach at the end of a season, you know, we've got 11 years' worth of cohorts for you to take a look at.
I think we've got a pretty good track record of both responding to the data and making our investment levels be responsive to the returns we're seeing and of being able to invest and find good places to deploy capital at attractive returns. I'm really confident we'll be able to get back into that range in the year ahead. Okay. I think on that note, that is gonna probably end our Q&A. Thank you very much to everyone who submitted questions and everyone who joined and listened to the recording, or if you're picking this up and listening later. We'll get a chance to talk no doubt to a number of you over the course of the next week or so. Thanks very much.