WE EXPECT – indeed we know – that many of our readers are well versed in the markets we serve. This is especially true of AIM. But reversion to the norm is the near-inescapable fate that haunts the principals of even the most successful businesses.
We mean, it is but yesterday it seems since Majestic Wine straddled its markets with seemingly unshakeable gravitas, but we must admit that until it popped up again this month on our radar we had well nigh consigned it to days gone by. We thought it had gone ex-growth.
To refresh your memory, Majestic is the UK’s largest specialist wine retailer, with 210 branches in the UK and two in France. It operates in four separate divisions, each with the fundamental goal of delivering sustained growth in shareholder value by doing the right thing for the Group’s customers, suppliers and people:
- Majestic Retail: The UK’s largest specialist wine retailer, with 210 branches in the UK and 2 in France. It helps people find the wines they will love through over 900 highly trained, specialist store team members. Sales for the year ended 28 March 2016 were £244.0m.
- Naked Wines: Funds independent winemakers to make exclusive wines at preferential prices which it passes onto customers. Naked Wines currently has 159 winemakers in 16 countries and 320,000 “Mature Angels” (customers). Sales for the full year ended 28 March 2016 were £104.3m (£102.5m of this was post-acquisition).
- Majestic Commercial: A specialist on-trade supplier that aims to support businesses to make their wine lists more profitable, with the unique advantage of running its supply chain through Majestic retail stores. Sales for the year ended 28 March 2016 were £45.6m.
- Lay and Wheeler: A specialist fine wine merchant. It aspires to be a trusted guide for people who love fine wine, supplying the world’s finest wines with a personal service. Sales for the year ended 28 March 2016 were £10.0m.
Alas, somewhere along the way the once rock-solid Majestic lost the plot – and did so to the extent of last year cutting the dividend…
Running a business is hard and comment is often cheap and superficial, but given the history, it was hard to escape the obvious conclusion that Majestic needed a change of management and/or another dimension to the business. Fortunately it got both.
The new business was Naked Wines, which it acquired almost exactly two years ago for up to £70 million. We’d better kick off by noting that, for the half-year to September last, there was a pre-tax loss of £4.74 million all of which related to adjusted items in the wake of Naked Wines.
And the second half of the transformation was that Rowan Gormley, founder of Naked Wines was appointed as chief executive of the enlarged Majestic. Here is what he had to say: ‘We reiterate our goal of £500 million annual sales by full year 2019’.
A notable indication of what went awry before the Naked Wines acquisition is the fact that Mr Gormley is concentrating on better customer service and customer retention rather than the expensive expansion of the brand’s network.
As of last November, he believed that revenue expectations were circa £440 million and that pre-tax profits for the year would be about £12 million. Here are the current forecasts:
|Year to March:||2017||2018||2019|
|Pre-tax profit £m||11.31||16.43||19.12|
|Earnings per share p||11.68||17.09||19.00|
|Dividends per share p||3.88||5.53||6.25|
His breezy confidence is infectious, but the meticulously-minded should note that there is still a lot of integration on the ground to take place (not to say in the final accounts) as store closures and like matters are dealt with. Not to say amortisation and impairments alongside such delicacies as the normal share-based payment charges.
But the underlying thrust is clear enough and the forecast price earning ratios of forecast 2017 of 28.9 to be followed by 20.7 in 2018. These ratios are somewhat eye-watering, but justified by the dramatic spurt in eps growth of 220% this year and 43% next, giving an attractive PEG of 0.72 for this year.
Verisimilitude is added by the concrete restoration of the dividend. Another point worth noting. It is sales growth (up 10% on the last reckoning) which is the driver. And the company has that £500 million in its sights by 2019.
It has to be said that Majestic Wines hasn’t updated shareholders with its progress recently. The last we heard was its bulletin on Christmas trading, which was strong. Hopefully, we’ll have another trading update before to long, as the next set of results are not due out until June.
Here’s something else.
Investors may well remember the booze cruises prevalent more than a decade ago. When Majestic Wines was in its heyday it seized on these and serviced its customers richly (not to say cheaply from its continental locations).
It still has them; with Britain’s future vis a vis our neighbours subject to possible radical changes once more, could there be an opportunity here again?
Bonne chance! Cheers and good luck.
BUY Majestic Wine (373.25p; market capitalisation: £258.7 million; yield 0% (forecast 1.6%); initial stop-loss: 298p; EPIC: WINE: sector: Retail- ers; classification: AIM; website: www.majestic.co.uk; tel: 0345 605 6767).