Good morning, and welcome to the Naked Wines plc investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted anytime via the Q&A tab situated in the right corner of your screen. Just simply type in your questions and press Send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions posted today and publish responses where it is appropriate to do so. Before we begin, I'd like to run the following poll. I'd now like to hand you over to James Crawford. Good morning to you, sir.
Thank you, Alessandro. Good morning, everybody. Welcome to the Naked Investor Meet Company presentation. I'm James, I'm the CFO at Naked. I've been at Naked almost 10 years, both as CFO and also managing our U.K. business for a stint in the middle. Came back to the CFO role in July of last year, and looking forward to talking to you today about our business. So I'm gonna run through 15, 15-20 slides, and then hopefully that will leave some time for Q&A. Please do submit some questions. We've had a couple pre-submitted. It'd be great to have some more on there and see what you're interested in talking about. So I'm going to start with just a little bit of context about Naked, for those who are new to the business. Naked sells wine.
We support independent winemakers, and they make us exclusive wines at preferential prices. And the idea is that through our customers supporting winemakers, we get this great value that we can pass on to the customers, and also help customers really feel good about the wine they're buying by connecting with our winemakers. So we see it as our purpose to connect wine drinkers with great independent winemakers, really building connection, and that gives people a sense of kind of value in the wine and also the impact they're having on the individuals who make it. By doing that, we're able to build brand awareness, we're able to enhance kind of quality, and actually make people, as I say, feel really good about the wine.
Ultimately, that's quite disruptive versus the traditional wine business, which has been very focused on either brands or appellations and pricing, and not actually uncovering the stories of the heroes who sit behind the product and make the product. When we put that together, it generates a virtuous circle. So we call our customers Angels, because they put money into their account every month, as a prepayment against the purchase of wine. And that generates two things for us. It generates a stream of cash flow, which we're able to invest into the supply chain and support winemakers in what's a very capital-intensive industry.
It also generates a stream of data as to who is ready to shop, how much cash they've got in their account, and over time, we build a profile of the kind of wines that people like and enjoy and their shopping habits, and we can use that to really customize their experience. As I said, we use the money that Angels put into their accounts to back winemakers, generally through prepayment towards wine, sometimes a set of stage payments. In the U.S. market that we operate in, we actually buy grapes and operate a winery, which they then come and work in to make their wines. And that gives us wine that's made exclusively for us. It's wine that's made with preferential economics because we've helped support the capital base of the winemaker. So the winemakers then make beautiful wines.
We do the rest in terms of sales and marketing. So a big challenge, if you want to be, an independent winemaker, is how you get access to the market. We provide that in a ready-made way to a set of customers who are already engaged in the journey of that winemaker. And ultimately, that helps us generate revenue and scale. And that scale means more Angels, which means more funding, and you go round and round the circle, building a better business. But it's not a business without its challenges, and those challenges at the moment have really been born out of the growth we saw through the pandemic. On the left-hand side there, you can see how revenue scaled significantly in 2020, as did the Angel base. You don't really see the full growth in this chart.
And then since, since the pandemic has finished, people have reverted their shopping habits somewhat back to where they were, and we've seen a decline in the scale of our customer base. On the right-hand side, I think this is, this is where we kind of show what one of the big challenges in the business is. During that pandemic, we had to very quickly scale business. We built out a big fulfillment operation. We also made significant commitments to inventory, to our winemakers. And actually, as we've not delivered sustained sales at the level that we hoped to, that has led to an increase in inventory within the business. We have not seen an increase in the amount of Angel funding, and prepayments that we've got, so we've had to fund that inventory through the business' cash.
As a result, we have seen liquidity reducing over the last few years, and we've now flattened that curve. One of the challenges in the business has really been the aftermath of the pandemic in terms of liquidity and also in terms of the cost base that the business has, because we built significant staffing and a bigger fulfillment operation than we ultimately needed as we went through that pandemic period. I think that's just useful context then to talk about some of the results that we've announced recently, and how that aligns with the plans that we've got and the actions that we're taking. A lot of these slides will have been taken from our half year reporting, or our trading statement, if any of you have seen those recently.
But the kind of three areas of focus are around strengthening the balance sheet, so getting the right level of inventory and commitment to our winemakers, releasing cash by reducing that inventory, and actually getting our credit facilities in the right shape for the shape of the business that we've got. Making our profitability sustainable, we announced an GBP 18 million adjusted EBIT number for the last full fiscal year. It was loss-making at the bottom line due to inventory provisioning and goodwill write-offs. But actually, you know, our adjusted measure is intended to demonstrate the underlying profitability of the business.
And with costs coming out and more costs to come out, we are driving the business to a place where we can deliver profitability at a lower sales level, should that decline in revenue continue, and I'll talk about why we think that's happening in a moment. Actually, we do want to stabilize the customer base because ultimately a smaller customer base is what is generating a lower revenue hub. Then actually, we wanna go from making that profit sustainable to delivering profitable growth. Prior to the pandemic, this was a business that grew pretty consistently around about, you know, 10%-15% a year. It had a pretty reliable marketing model and a payback model that supported that in terms of returns on that marketing investment.
And by rebuilding that payback and continuing to invest, we, our goal is to get back to a position where we're growing this business again, but with the cost base where it will be, we'll be able to do that whilst delivering profitability, which was not something that we were able to do consistently prior to the pandemic. So where are we on that journey? Well, lots of good news. We are moving in the direction of cash generation. As you saw on the earlier slide, the kind of cash outflow has now all but stopped. So we're at the kind of bottom of that liquidity valley and should be building our way out of it, in particular, in H2 of the next fiscal year. And that's because we see the opportunity to reduce inventory materially and generate cash out of that over time.
Costs are coming down. That was evident in the half year reporting, and we announced with our trading statement that we've just undertaken an SG&A reduction exercise that will deliver GBP 7 million a year of cost benefit. We also have a series of changes we've made in our fulfillment operation and contractual arrangements that will deliver additional savings through the warehousing line in particular. And then actually, we see really positive trends in our existing customer base. For the customers that we're retaining, sales per customer are increasing, and the rate of cancellation, the attrition rate, is down, so we're actually holding on to relatively more of those customers. But the bad news is that actually recruiting new customers remains tough, and we continue to not recruit quite enough new customers to maintain the scale of the customer base, hence, revenue is reducing.
Drilling into some of those trends in a bit more detail, this is kind of a table that shows how we've really moderated the rate of cash consumption. If we look at the first half of fiscal 2024, which ended back at the end of September, and compare it to the year previously, you can see at the bottom of that chart, you know, in the prior year, the business consumed nearly GBP 22 million of cash, and the majority of that went into that change in inventory line at the top of the blue box. It is a seasonal business.
You always build inventory in the run-up to Christmas, but you can see very much how then, in this year, we significantly moderated the rate of increase in inventory, and really, that change is what flows through to a significant reduction in the rate of operating cash outflow. And then on the right-hand side, we've just shown here our inventory trend. You can see how significantly it has increased over the last two years. And you can see that our forecast range shows that reducing, you know, whether we're at the kind of top or bottom end of the sales forecast, we should see that inventory level reduce over the next 18 months or so. We have good line of sight to the commitments that we have.
We are reducing those below our cost of goods level, and really, we need to then wait for the peak sales in H2 of next year before we really see that inventory level drop. And again, this, this is the chart that kind of shows some of the history of that. So the dark bars are the purchases we've made in terms of inventory. The lighter bars are the cost of goods we've discharged. You can really see how in FY 2022, you know, the dark bar was GBP 50+ million ahead of the light-colored bar. That is a significant build in inventory. That has been a significant drainer of cash.
A little more of that in FY 2023, and then we start to reverse that trend through 2024 and 2025, and that is where we see cash being released off the balance sheet over the next two years. And because liquidity has been, an area of focus for a lot of our stakeholders, I think it's worth understanding a little about how the balance sheet is funded. Two big sources of funding outside of the equity in the business, one is the Angel funds that we hold, which were around about GBP 70 million when we reported. That's the dark blue bars on the chart on the left, and you can see those Angel funds grew through the period of the pandemic as we got more customers, and has since stabilized and actually dropped a little bit as the customer base has shrunk.
I think what's important is people often worry about this business being susceptible to angels withdrawing their funds very, very rapidly. If you actually look at the percentage withdrawal of the balance over a rolling six-month period, which is the yellow line, you can see as the customer base has improved, as we've got kind of customers who have got longer tenure and therefore generally better retention, the rate at which Angel funds are being withdrawn and refunded has been shrinking. And then just on the right-hand side, the business has a credit facility secured on its stock. It's an asset-based lending facility. That's what ABL stands for. I think candidly, the structure of that facility was wrong.
That facility was opened in early 2022, just before I came back into the CFO role, and it was basically linked to continued growth in the business. Obviously, the business did not continue to grow, so we've been through a process of refining and restructuring that facility with the incumbent provider. But we're now in the process of full replacement. We have a debt advisor appointed, and their preliminary view is that we should be able to source a replacement which is actually better suited to the business, provides more net liquidity, and hopefully greater flexibility around what we can and can't do with the P&L. So that was the balance sheet.
Looking at the cost initiatives we've undertaken, yeah, if you looked at the business as it was, it needed just under GBP 280 million of revenue to remain profitable at the Adjusted EBIT level, which is our critical profitability KPI. With the cost actions we've just taken, as I said, we took GBP 7 million out of the run rate of SG&A a couple of weeks ago. That will actually reduce to just under GBP 250 million. Yeah, for what it's worth, the consensus in the market for revenue this year, I think is somewhere around about the GBP 290 million number. So again, we've taken costs out to give us the latitude that should the business continue to decline, we can still be profitable.
Obviously, our hope is that the business will not continue to decline for reasons I'll explain in a moment. And then, as a highlight, our repeat customer performance is good. This is a bunch of metrics looking at the customers who obviously have not canceled. But if we look at the amount of revenue that we're generating for each active Angel, which is our measure of customers, you can see that between the first half of fiscal 2023 and into 2024, that increased, and it increased about 7%-8%. So actually we are seeing customers willing to spend more. And, you know, unfortunately, underneath that, you see that the number of customers who are remaining in that period has shrunk, and that is what's ultimately driving the revenue trend.
And then, yeah, although the customer base has been shrinking, the rate at which the customer base is shrinking is slowing. The top right-hand chart, you can see a reduction in the monthly attrition rate, averaged over three months, that's been taking place over the last couple of years. I think, yeah, important to understand that that means we're seeing an increasingly loyal core of customers remaining. I think important that we don't fully take credit for that. Some of that is just the arithmetic effect of having a lot of new customers arrive during the pandemic. You'll see the spike upwards in kind of March and June of 2020. People tend to cancel subscriptions early in the life cycle, and as you have fewer and fewer customers early in the life cycle, you do see an improvement in that.
But that improvement is real, it will be enduring, and it gives us confidence that the, the rate of customer base reduction is slowing. So let's talk about the challenge. The challenge is in recruiting new customers. I think, you know, this slide is just for those who are new to Naked. We've always been very disciplined, and we've had a pretty well-established model as to how we invest in customers. And ultimately, we make an upfront investment in recruiting a new customer, which is a combination of marketing expenditure, plus any profit or loss on the first order. It varies depending on which of our, our three markets, the U.K., U.S., and Australia, you look at. And then what we do is we look at the profitability generated by those customers over the next five years. And the chart here is an illustration of that.
You know, per joining customer, you make the most money in the first 12 months because you're then losing customers. But you have a long tail then of sales and contribution that comes from those customers, and we measure this payback at the contribution level. That is sales, less the cost of the product, less all the cost of fulfillment, whether that's warehousing, couriers, customer service operators, credit card fees, et cetera. And we look at that over five years, and historically, we've delivered 2x or actually greater than 2x payback over those five years as we measure the ratio of that future value to that upfront investment. But those economics have become significantly more challenging recently, and that's a combination of really fulfillment cost inflation.
There have been significant uplifts in things like couriers, warehousing, and the people costs associated with those as we've been through the post-COVID inflationary period, and a tougher marketing environment. Both a combination of a weaker economy and changes made in a lot of digital platforms for privacy reasons, meant that we saw a significant reduction in the efficiency of those channels. So lower customer recruitment is a challenge. The chart on the left here shows a reasonably long-term history, where you can see our, our payback trend on the yellow line has reduced from above that 2x that we always targeted, very much above it during the peak of the pandemic.
And then, you know, it's somewhat below, and then we've focused quite heavily on trying to drive up from that low point of 1.2x, which was kind of the first half of fiscal 2022. And now we're around about 1.5x, and right now we're trying to balance a combination of continuing to maintain scale and drive cash out of inventory, while remaining disciplined and testing some different approaches to how we recruit customers. I'll talk about in a minute. So there's some tensions in what's driving that metric. You can see alongside that, the kind of the pale blue bars show the amount that we were investing, and during the peak of the pandemic, we invested, you know, GBP 45 million-GBP 50 million a year.
Currently operating more at a run rate, you know, around about GBP 20 million a year, and targeting GBP 25 million a year as a sustainable level of investment. On the right-hand side, you see the number of new members that we gained in a year with a huge, huge spike during the pandemic. That is what drove a lot of that growth. And then, yeah, as we've entered this period of lower payback and lower efficiency spend, we've cut the marketing budget substantially. And that means we've seen fewer new customers coming through the door. But I think here, for the first time, if you look at the right-hand side of that right-hand chart, you do begin to see a stabilization in the number of new customers that we're recruiting.
And when you stabilize that number, you begin to get a much clearer forecast of the scale the business is trending towards, especially when you combine that with the stability and improvement, in fact, in the retention trend of the repeat customer base. But we do have some emerging signs of positivity in new customer recruitment. So I referred earlier to some testing that we've been doing, in terms of different ways of recruiting customers. One of the ways that we've done that is essentially a different form of subscription model that's in particular appealing, we think, to younger customers. We've been testing that quite a lot over the last 12 months or so, and at scale through the recent peak.
The chart here shows, if you imagine that building contribution from a newly signed up customer over time, under 35s have never delivered us the same value as we get on average. Our customer base, on average, is probably around about 55. But the control is kind of taking an under 35 customer through that historic journey. The light blue test line shows that we've almost doubled the value of an under 35 customer by taking them through a different journey with a slightly different form of subscription. And we're beginning to test that on broader groups of customers across different markets, and, you know, seeing some signs that we can deliver that.
And that's one of a number of initiatives that gives us some confidence that we have opportunity to rebuild the number of new customers that are joining us, and therefore actually see signs that we can turn the corner, and rather than the, the net of that improved attrition and the lower number of signups being a small decline in the customer base, turn that towards flat and hopefully, over time, back into growth. I think the other thing that's important to say is, you know, whether or not we're ultimately successful in deploying, better payback marketing investment and customer recruitment or not, actually, with the cost action that we've taken, we think this is a business that should still be profitable and cash generative over the, the medium term.
And we announced some, what we call some guardrails of how we're gonna run the business to try and remove the amount of volatility we saw during the pandemic. Those guardrails are really around, you know, we will spend GBP 25 million a year on new customer recruitment, and we will let payback move depending on how successful we are in deploying that. We will maintain our SG&A base, our fixed cost base at around about 11% of revenue, which means that, you know, we have to cut our cloth according to the scale of the business.
But I think in particular, thinking about that marketing spend guardrail, if we're only able to achieve a 1.5 times -1.75 times payback, the business should still be able, over time, to deliver GBP 280 million-GBP 300 million of sales, and probably an EBIT number of around about GBP 10 million, given the cost actions that we've taken and the opportunities we see. It will still reduce inventory over the course of a couple of years, and we will therefore still generate significant cash flow out of the business. If we're able to deliver payback out of that investment in excess of that, because efficiency gets better, the initiative I've just talked through actually carries through and scales across the business, you could see sequentially higher sales and EBIT and cash flow out of the business.
But you don't need to see a massive uplift in that to see a business forecast over the coming years, which still delivers good profitability at the adjusted level and good cash flow. So that was really kind of a lot of the headlines we shared for the H1 results. I think, you know, didn't put some of these numbers in, just summarizing them here, but GBP 132 million of revenue in the half. It's a -18% constant currency number, which really reflects the decline in the customer base. And in a second, I'll show you what we did in the third quarter, which is a sequential improvement on that. Still delivered a positive adjusted EBIT number of GBP 2.2 million. We did take a statutory loss.
We wrote off a lot of goodwill that relates back to the kind of corporate evolution and the sale of Naked into Majestic over time. And that generated that statutory loss before tax. Closed the half with a net cash position, excluding lease liabilities for those familiar with the intricacies of lease accounting, of just under GBP 3 million, and that means that once you add our credit facility alongside that, it gives us liquidity of GBP 48 million. And you could already see G&A costs coming down, a 27% reduction in the first half. And we very much kind of were announcing that we do see the inventory optimization delivering significant cash flow over the next 18 months or so.
Then I think I've talked through the majority of those operational highlights already, but really kind of reiterating that we are at the turning point where we move in the direction of cash generation, repeat customers performing well, and, you know, some real positive signs in our new customer recruitment model. Then last week, we announced a trading update for the peak period of Q3, October, November, December. Obviously, you know, being a retailer and a wine retailer, peak is very important. The peak trading was in line with our expectations. Constant currency sales were 10% down. Obviously, that's an improvement versus the -18% in the first half. Again, really driven by the repeat customer base, which was about 12% smaller. Actually, we delivered some more improvement in sales per repeat customer.
We did acquire more customers year-on-year, albeit we spent significantly more to do that. And, you know, part of the reason we're doing that is we're beginning to see some of these green shoots in how we recruit new customers. For the quarter, the adjusted EBIT, we expect to be about GBP 3 million-GBP 5 million, which is consistent with the expectations we had. And beginning to see a stabilization of that net cash position, so all the way back to that very first chart. Actually, the net cash position was all but flat year-on-year. If you do the constant currency adjustments, you were kind of GBP 4 million a year ago, GBP 3 million now. And again, the credit facility remains available, delivering this total liquidity of about GBP 45 million...
And then we announced that we had undertaken a reduction of SG&A to GBP 7 million of savings per year. Takes the guidance for fiscal 2025 down from GBP 37 million-GBP 40 million to GBP 30 million-GBP 33 million a year. There are some one-off cash costs to execute that, which we expect to report as an adjusted item. And beginning to see signs of inventory, you know, stabilizing, so closing Q3 inventory of GBP 163 million versus GBP 173 million a year ago. And that's really where I'm about to stop presenting and start answering questions. But I think, you know, in summary, we are making a set of changes to make Naked Wines a leaner and stronger business than it has been.
You know, we have a great core to this business in the repeat customer base, high levels of loyalty, but the absolute scale of it is recovering from the post-COVID challenges. We see some good progress with enhancing our ability to recruit new customers through an enhanced customer proposition. And we see a, you know, an 18-month outlook where we should generate significant cash with inventory coming down and that turning into cash. You see the first signs of that in the stabilization of the net cash position. We're making progress replacing the credit facility with something that's more fit for purpose for the business. And SG&A is down, which means, you know, this business should be able to break even at the Adjusted EBIT level, at about GBP 250 million in sales. And that's where Naked is.
It's been a journey of massive growth through the pandemic period, and then unfortunately, dealing with the aftermath of that, in common with a lot of businesses with too much stock and too much cost, but making good, meaningful progress on delivering against changing that. And that's where I will stop speaking and kinda hand over the questions. I say, "Stop speaking," I'm gonna answer questions, but please do put any more questions that you may have into the Q&A.
Perfect, James. Thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab, which is situated on the top right-hand corner of your screen. But just while the company take a few moments to read those questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via investor dashboard. James, as you can see, we have received a number of questions throughout today's presentation. If I could just hand back to you just to read out those questions and give responses where it's appropriate to do so. I'll pick up from you at the end.
Yep, I'll do that. So I'm gonna start, kind of quick one: How is the search for the new CEO progressing? Would it be Rowan's intention to still remain as chairman in the event the new CEO was to be appointed? So, the search is progressing, well, looking at a range of options. Absolutely, yes, Rowan's intention to remain as chairman once that new CEO is in place. He is not intending to remain as an executive chairman forever, but I think, you know, there will be a, a succession of him back to the chair, and then no specific plans on how long he stays in that role. Could be long term, don't know. But yeah, making good progress, and when we have news, then we will, we'll share it with you.
One on our addressable market. So is our estimate of a $25 billion total addressable market still accurate? For those who may not be familiar with that number, it's a number that we've put in our annual report a number of times. That number was generated based on the overall wine market in the three geographies that we operate in, then segmented by price point, because we don't operate at the lowest price points in any market. It was then adjusted for the number of people active in that market who shop online, not necessarily for wine, but for other things, and for people who are engaged in the wine that they buy rather than picking up whatever's on the shelf. So I think it's definitely still a good read of the overall market that should be addressable by an online wine retailer.
I think if we were to be a little circumspect, because clearly our customer recruitment challenge would suggest it's not easy to penetrate that market, I think we'd say that there are probably some barriers in the way that we do business, whether it's the subscription, whether it's the kind of nature of the range that we have, that mean that there are segments of that addressable market that it's more challenging for us to meet. I think the good news is, if you think about, you know, one of those segments that's been historically challenging for us has been the younger consumer in that market, and we are now exploring ways to evolve the proposition to meet that customer more kind of where they want to be.
And I think that gives us kind of confidence that we can start to pick off big chunks of that addressable market and be relevant to it. So I think the overall answer would be, yes, it's still accurate, but there are clearly subsections of that market that we are better and worse fitted to, and we are systematically trying to work out how we make the business able to address all the components of that fully addressable market, rather than the subsets that we're in today. Gonna move on. So new customers are up 35%, investments up 70%. Is that mainly a delay from investment to sign up, or is it lacking economics? Good question. I think a couple things. One is, that's the full quarter.
So during that quarter, we were kind of still running some of the testing in different countries with different ways to do things, and we know that that testing gives us kind of weaker economics. I think the other thing would be that things like the flip side of that testing would be that where we are now recruiting new customers in that under 35 segment, for example, we are expecting much higher value from each of those new recruits, whereas previously it was lower. So we have set our investment levels and our tactics to reflect that, and therefore, it's kinda okay that you're getting a lower conversion of money into new customers if your expectation is that those customers are going to be worth more on average. And then there is going to be a degree of delay.
One of the things we've seen quite commonly is the biggest channel we use for customer recruitment is marketing partnerships and parcel inserts. A lot of people really struggling to estimate and forecast the volume of orders that they would be circulating that drives that insert traffic. And I suspect that we do have a bit of a backup of inserts that will hit during Q1, but I wouldn't like to kind of bank an upside from that because the uncertainty in those volumes will probably kind of carry on for a while. And then the second part to that question: Is the 1.4 LTV to CAC estimate based on current low repeat margin, or does that take into account the margin improvements you'll achieve in FY 2025? Good question.
So obviously, when we look at a payback forecast, it's based on our forecast LTV for customers. We run that LTV forecast based on a model that forecasts sales based on history of a set of dimensions of each customer, and then we apply an expected repeat margin to that. Some of the margin improvements we expect in FY 2O25 would be included in that, not necessarily all of them. So we have to take a view on the forecast margin. And the way that we do that is we build a kind of low-end scenario based on the drivers we have and the forecast that we have, and we use that. So I would expect there to be a little LTV enhancement when we see the full range of cost savings come through in the contribution margin.
But yes, some of it will be factored into the way that we forecast that. I think that links to another question we've had, which is: How are you going to return the payback on new customer acquisition to previously attractive levels? That is ultimately the big, big challenge, and we don't have all the answers. The reason that we show those scenarios with, you know, if we're not successful, this is what it looks like, and if we are successful, this is what it looks like. I think we've touched on part of it, so, you know, continuing to take cost action in the fulfillment network, and delivering improved contribution margins. To the previous answer, some of that is baked in, some of it is not, so there should be more opportunities there over time. Excuse me, my phone's ringing.
Sorry. Hopefully, you can all see me. The screen's just disappeared, which is unhelpful. There we go. And then, yeah, actually improving the efficiency of the marketing spend, so building, you know, that kind of new recruitment model into our numbers. You know, just in and of itself, the data I showed you on the under 35s, if we apply that to where we've seen some improvements, there is a 0.1 or 0.2x payback improvement there, and whilst that sounds like a small decimal number, on a journey towards 2x, you know, that could be 10% of that, that improvement needed all. So we actually think that there are better ways of triaging customers into different new customer recruitment funnels.
Once we have two or three or even four different kind of models for recruiting people, we think we can then kind of optimize further from there to, to get to that place. And then we are continuing to build out new channels. I think the business has historically been very dependent on the partner channel, the digital social media channel. The digital channel shrank significantly through that period of challenge. We are slowly rebuilding that with different approaches to creative and different approaches to deploying that creative. And actually, you know, we recognize as a business, we need a broader mix of channels that all support one another.
I think if we can, if we can crack that better, as we know a lot of our peer group businesses have, we will be able to see kind of benefits across the payback spectrum from that. Right. Can I give some color on the SG&A cuts? Which buckets are the savings coming from? Ultimately, the majority of our SG&A cost is people related, about 70% of it, and about 70% of those savings come from people-related costs. Other parts come from, you know, things like office leases. We've been over time moving ourselves, as have nearly every other business, to appropriate sized offices, to find new ways of working post-pandemic. We're reducing some of the advisory spend that we've used historically, et cetera, but the simple answer is the majority of that is unfortunately people costs.
It's been a challenging process, but one that we're coming through the other side of now. I think, there's a couple questions in here around inventory and cash, which I'll try and bucket up. So, you've reduced inventory intake by more than 50%. Are you having the right inventory for FY 2025 peak trading, or would you say inventory quality improves as you use opportunities to cut down wine makers not selling and keep the wines customers want? Yeah, a lot of dimensions in there. And yes, we believe we will have the right inventory for peak trading. We are going to end up with slightly different check ranges, but, you know, one of the things we've done, for example, is we've moved inventory that was committed for the US market into the UK market.
And that sounds like it must be really hard. Aren't you gonna have to sell a lot of American wine in the U.K.? Well, actually, in the U.S., we sell wine from around the world. So in a number of big opportunities, it's exactly the same wine that we're selling in the U.S. as the U.K., and we will ship that container from, say, South Africa, straight to the U.K. rather than the U.S. So there have been some things that we are able to do like that, that means we absolutely preserve kind of range quality. When we looked at the kind of range changes by country and wine maker, you might see a few percentage point movements between category.
Yes, we will sell more American wine in the U.K. and we're engaging our U.K. customers about the great value opportunities they're gonna have as a result of that. But I think we are pretty confident we're headed towards the right shape range. And look, that range quality should improve because we will end up parting company with some winemakers. You know, you can't see a business shrink by kind of 15%, 20%, 25%, and believe it's right to maintain the full range of the supply base, because it would mean that everybody's expectations had to be shrunk. So, you know, we are taking that opportunity, and obviously we're working collaboratively with our winemakers, as we always do, to ensure we understand the impact on their business and do that in a responsible way.
I think that speaks to a different question, which is: How is Naked strategically managing winemaker relationships as the business adjusts to its new scale? Look, there have had to be some challenging conversations. We have had to significantly reduce volumes. You know, when you look at those inventory numbers, it's clear across the supply chain there is, you know, 12 months excess inventory. But rather than tell everybody we're not buying anything for a year, because that would neither give us the right shape of inventory nor sustainability for the winemakers, we're working one-on-one with them to understand, you know, the art of the possible, what support is needed, et cetera. And as I alluded to previously, also, you know, changing the winemaker supplier base somewhat, to reflect the fact that we will need fewer winemakers for a business which is smaller.
So hopefully kind of that answers those questions. Trying to group these up somewhat as I go. I think, I guess, if we're talking inventory and balance sheet and cash flow, how much cash do you need on the balance sheet before we can talk about capital returns? How do you think about this, and how should we as investors? Great question. The challenge in the balance sheet and the cash is that you always have to have enough liquidity available to manage your downside stress test as you work through going concern testing.
You know, I think, yeah, as you have seen, we do still carry uncertainty around going concern because of the wide range of those downside stress tests and actually in a period of change for the business, the wide range of drivers that could move. Ultimately, you know, this is a business that probably needs to carry about GBP 10 million of operating cash from month to month. It probably needs GBP 15 million-GBP 20 million of clear liquidity headroom above that, not liquidity, which is held by the bank, but available liquidity. And I think, yeah, hard to answer this question specifically because we're in the process of sorting a new credit facility.
If we have a new credit facility that can comfortably respond to, you know, GBP 15 million, GBP 20 million, GBP 25 million of cash if needed, then, yeah, I think you're very much in the position when you can look at any additional cash above that as excess. But we have to really kind of complete the process of what does a new credit facility look like, at this point, and make sure that that, that foundational piece is in place before we can really talk about, you know, how much excess capital might we have over what time frame. Right. Couple of probably questions more about kind of customer base and market. So retention of loyal Angels must be a priority. Are you using their buying history effectively, given your ample stock situation? One second. Yeah. So absolutely, retention is a priority.
You know, if there's one number which the long-term forecast for a business is, like ours, is very, very sensitive to, it's that retention number. A couple of percentage point changes here and there compound significantly over time. Are we using their history effectively? Yes. So we, we use the data a lot in the month-to-month merchandising plan, and also in evolving, you know, whether it's the range or some of the kind of product propositions. So if any of you are Angels, you'll get offered a free bottle every month. The free bottle that you're offered will be tailored based on your buying history. If any of you shop the site, there are options for you to fill your basket. There's a product called Wine Genie, which will automate a case, a kind of bespoke case for you every month.
All of that is using the data set that we have on what you've been buying, what you've rated, whether you've bought it again. And essentially, we then look to marry up, you know, where we have significant stock headroom with chunks of Angels that like that kind of stock, and we might even put together a specific case for a specific deal for people. And that may only get merchandised to them.
It may get merchandised to them at checkout, it may get merchandised to them through email, it may get put together as some form of marketplace deal where we say, "If we can find 2,000 Angels all willing to take a case of six of this bottle, which we think we, we have a lot of, we can clear for this winemaker, then we'll ship it, but it's only worth shipping it if we do a full container." So, yes, we're using that history all the time, and we are very much informing our range plans around that history as well. Can you give an indication of how offline retailers performed over the last two years in the U.K. and U.S.? Have you lost share to these competitors?
So we don't spend the money buying the Nielsens of the world or the IRIs of the world. It's expensive, and it only tends to give kind of high-level data. I think we have certainly seen a reversion towards store-based shopping across all categories of retail. You see this across the e-com and kind of D2C space. Yeah, you only have to look at the Majestic business that we separated from, and while, you know, I think they generally choose their weeks quite carefully. I think they chose eight weeks this peak. I think they reported something like 7% or 8% increase in sales. And obviously, that's well ahead of kind of where we are.
So I think it would be hard to deny that you have seen a reversion to store-based shopping, and therefore, we probably have lost overall share to those competitors. I think, you know, if you look across the universe of direct-to- consumer and kind of e-com businesses, you know, I saw Virgin's trading statement was out yesterday. They were +2%, but they were +2% on the back of, I think, -27% the year before. So I think if you look over the kind of two-year period, we've probably done slightly better than them. The Wine Society publish their accounts each year. I think their trends have been broadly similar to ours. I don't think I've pulled the latest Laithwaites accounts yet.
I'm not sure if they're out, but we've certainly seen kind of, you know, double digit type declines in the UK. And then in the US, and, you know, this, I think, also addresses a question we've had, which is: Have any direct consumer competitors in the U.S. exited the market? Who's winning? I think in the U.S. we've seen businesses like Wine.com, announce a revenue number that was substantially lower than the revenue number we've seen in previous kind of PR-type reporting. In the U.S. you know, there have been businesses who have exited, so Winc went through a bankruptcy process. They've been bought out of that, but I think they are, again, sequentially smaller than they were. And, you know, we do have contacts at peers.
We know everyone is wrestling with a lot of the same challenges, so I don't know whether we could confidently say we're winning in the US market. I don't think that we would say that we're losing. I think we would say that we are in the pack that are seeing the same dynamics, and those dynamics impact the previous question of people who found online purchasing convenient over the pandemic, actually finding that they are going back to store-based purchasing. And look, it's our job to convince them that there's no need to do that and that there are benefits, and that's what we continue to do. Right, what have we got left? The philanthropic credentials of Naked are not in question.
Is it time to focus on the business now to ensure this component of Naked DNA can be deployed in future years? I think that ultimately, hopefully you see from the kind of first slide, we're very, very focused on the business. Naked is a business that likes to do the right thing. We believe that by treating suppliers truly as partners, treating staff like family, we, we generate best outcomes for shareholders. But we are taking tough decisions to the business, whether that's at the cost line, whether that is in terms of the inventory purchasing we're doing, you know, so, you know, the focus is absolutely on the business.
Very clear to us that we have to reshape this business to the scale that it's at, even if that means tough decisions that don't appear as philanthropic as maybe we do to our supplier base and our stakeholder base. And I think, you know, kind of worth saying, I don't know whether there's any kind of misinterpretation of philanthropy. We don't run this business like it's a charity. We do do some great charitable work, but it's our customers that support causes like Carmen's Kids. You know, we do sometimes enable winemakers to support charities that they're passionate about by using our customer base to sell wine and giving a proportion of that revenue to charity. But ultimately, you know, we're a business that's here to deliver value for shareholders.
We think the right way to do that is by treating people the right way, but we do prioritize all the stakeholders to get there. And I think the last question I have here is: What's our view on the online wine market size, e-com penetration, especially in Western Europe? Not sure if that question is kind of trying to explore should we be in other markets, or whether it's kind of more general in terms of what are the dynamics. Hopefully, I've covered some of the dynamics, the reversion back towards physical retail post-pandemic. But look, I think ultimately, over a, you know, a long-term period, call it 10 years, all of the reasons that the online... Well, the online sales in all categories have grown over that period, aren't going away, right?
It remains convenient, it remains cost-effective to time-poor people, it remains simple. So yeah, I think structurally, you know, we're still in the right place in terms of being or taking into kind of that, that long-term structural shift. I think what you saw was an acceleration of that shift hugely over a two-year period. We're seeing a small reversion in that shift now, and hopefully in a couple of years' time, we'll say that we're, we're kind of back, back consistent with the long-term trend. Not sure if that answers the question. If not, please do ping us a, a revised version or a, a follow-up afterwards. But I think that is the majority of the questions, or in fact, that's all the questions I've got on the list here.
Yep. Perfect, James. Thank you very much for answering those questions on behalf of investors. Of course, the company can review all the questions today and will publish their responses on the Investor Meet Company platform. But just before redirecting investors to provide you with their feedback, which is particularly important to yourself, James, could I just ask you for a few closing comments?
Yeah, sure. So look, first of all, thank you for taking the time to listen to us today. I hope you found this informative and interesting. I think, you know, Naked is at a really interesting point of its development, right? It has been a volatile journey. You've seen the rapid growth of the pandemic, the post-pandemic hangover. It has been quite severe. But I think, you know, you join us talking today at a time where we are really beginning to see green shoots in terms of stabilization of liquidity, green shoots around, you know, a slowing of the rate of sales decline and beginning to get to a point of more new customer recruitment.
And when you combine that with the favorable retention trends we've seen in the customer base, it does feel like we're at a turning point. And the management team are very clear that our job is to continue to drive the decisions around cost, around inventory, that ensure that we do turn that corner and get this business, you know, A, stabilized, and then, B, back into growth over time, and we believe that will be profitable growth. So that's where we're at. Thank you for your interest, and, you know, please do follow up with any further questions by the investor relations team, if you have any.
Perfect, James. Thank you very much for updating investors today. Could I please ask investors not to close this session, as you'll now be automatically redirected to provide your feedback, in order that the management team can better understand your views and expectations. This may take a few moments to complete, but some shall be greatly valued by the company. On behalf of the management team of Naked Wines plc, we'd like to thank you for attending today's presentation, and good morning to you all.
Thanks, everybody.