Majestic Wine downgraded as business still under pressure

A volatile share over the past few years, Majestic just took another of its regular dives. Graeme Evans explains why.

A "glass half full" message from Majestic Wine boss Rowan Gormley failed to win over investors today as shares dived 18% to their lowest level in over a year.

The slump for Majestic was reflected in a small loss in today's half-year results, with Gormley blaming the decline from last year's £3.1 million profit on new customer investment behind Naked Wines and a tough market in retail.

Despite the headwinds, which have also impacted full-year earnings forecasts, Gormley said longer-term expectations were unchanged and that Majestic should still meet its £500 million sales target for the 2019 year.

He said: "We were planning for tough times and we're investing through tough times because we know that's the route to a more profitable future."

However, Peel Hunt is worried by the state of the core retail business, given that industry conditions mean there's little room for any price increases to be passed on to customers.

The broker removed its ‘buy' recommendation and lowered its price target from 500p to 350p, having also cut its full-year pre-tax profits forecast for the current financial year by £2 million to £12.8 million.

Analyst Jonathan Pritchard said: "Only a handful of retailers have enjoyed the last six months and Majestic is not one of them.

"In like-for-like terms, 2% didn't look like a bad effort at first glance. However, both gross margins and cost ratios were under pressure in H1 and that looks unlikely to change."

Source: TradingView (*) Past performance is not a guide to future performance

Investec Securities is more optimistic, however, and shares Gormley's view that the company remains well placed in the currently difficult market.

While reducing forecasts by 15% to reflect higher investment levels and a more cautious outlook in retail, the broker said it continued to view Majestic as "an attractive long-term growth story". Investec has a new price target of 560p, down from 600p previously.

They noted that investment in customer acquisition in the Naked crowdfunded wine business had paid off in the half year, with new and repeat customers driving 14% sales growth.

The company now plans to increase investment by another £1 million this year, taking the total to £20 million as Majestic particularly looks to capitalise on growth opportunities in the United States.

The Naked business, which Majestic acquired three years ago, funds independent winemakers to make exclusive products at preferential prices.

Majestic expects the UK retail market to remain tough, meaning that it no longer expects earnings growth in its retail and commercial divisions in the current financial year.

It is also having to bring between £5 million and £8 million of additional stock into the UK to mitigate any potential supply chain disruption should there be a no-deal Brexit in March.

Despite this uncertainty, the company enters the peak trading season buoyed by a substantially bigger repeat customer base and a sharply improved trend in retail online sales.

Gormley told shareholders: "We are doing well in a tough market. We set out a plan in April and we are delivering against it. That plan was to accelerate growth by investing in new customers and, so far, the plan is on track."

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