Majestic Wine - will getting Naked work?

Majestic Wine: As supermarkets and on-line wine merchants have advanced, so Majestic has been backed into a corner. The loss of momentum culminated in the £70m (£50m up front and £20m contingent) acquisition of Naked Wines in April. As part of that deal, Naked’s founder, Rowan Gormley, became CEO of the enlarged group. Today’s results are for the old business’s full year to 30^th March 2015, which illustrate the problems faced by the old mini-warehouse model. Revenues edged up 2.3%, with UK retail stores LFL sales up 1.9%, having been -0.1% in the previous year. However, a 30bps drop in gross margin to 22.7% and a 5.7% rise in distribution costs dropped through to adjusted pre-tax profits of £20.9m against £23.8m last year. Adjusted eps fell 10.7% to 24.1p and as previously announced the final dividend for FY2015 and interim for FY2016 are being passed.

At present the new CEO is conducting the near obligatory strategic review of the enlarged group. The first initiatives (which seem to be aimed at re-emphasising Majestic’s specialist expertise) are cited to be costing £3m, with most of that falling in the first half of FY2016. In the context of Majestic’s historic profitability and Naked’s ‘near break-even’ status, that is a major investment. The bulk of the conclusions will be unveiled in the autumn at the interim results, but whilst Majestic Calais made £1.4m last year, the rationale for retaining wine merchant Lay & Wheeler, which slipped to a small loss last year, looks cloudier. All this work is at least being undertaken off the back of a balance sheet, which showed net cash at year end and remains strong, even after taking on some debt for the Naked Wines deal (leaving pro-forma net debt/EBITDA at 1.7x).

Clearly Majestic has changed from being a maturing stock with a yield to a hybrid of recovery (Majestic retail), growth (e-commerce and commercial) and entrepreneurial expansion (Naked). This update is almost certain to see FY2016 forecasts come down as a result. Whilst existing consensus is for 25p of eps in CY2016, it looks (maybe harshly) like 20p could be a result now. At 420p that is a recovery/growth PE of 21x, with the dividend pushed right down the agenda. Back in April they stated that  “future dividends will be progressively re-instated by FY2018”. To be confident in the shares I think you need to wait for a buzz to re-emerge about the warehouse sites……all the more reason to keep visiting the stores and stocking up, on a regular basis. (Neil Cumming^, 15^th June 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower