Wine specialist Majestic Wine (WINE:AIM) warns profits for the year ending 3 April 2017 will fall well short of expectations, news that sends shares in the Watford-headquartered retailer crashing 27.5% lower to 314.25p.

Six weeks before it uncorks interim results, the UK's biggest specialist wine retailer serves up a disappointing update that leaves a sour taste with investors. Their palates were just becoming accustomed to more positive newsflow under new CEO Rowan Gormley's (pictured below) turnaround strategy.

The new CEO of Majestic Wine, in their Mayfair store. London, UK 09 Apr 2015.

Majestic warns it will fail to meet consensus expectations of a £16.1 million profit before tax for two key reasons.

The first is the 'even more challenging' first half experienced by the Majestic Commercial business, a specialist on-trade (pubs, hotels, restaurants) supplier which has seen flat sales and a sharp decline in gross margins.

'Assuming these negative trends persist through to the end of this financial year, and with the balance of the year being seasonally significant, the Commercial division's EBIT performance could be around £2 million lower than expectations,' cautions Majestic. 'We need to find a better, more profitable approach for our Commercial operations as part of the group and as a result an internal review is now underway,' it adds.

Majestic Wine

The second problem area is Naked Wines, the online wine business acquired in a £70 million, transformational deal (10 Apr '15) that saw its founder Gormley hop into the hot seat of the enlarged group. Majestic warns it will bear higher costs in the first half following an unsuccessful direct mail campaign in the US (since discontinued), while a lower-than-anticipated acquisition of new customers or 'Angels' will also constrain profit growth over the next 12 months.

Naked Wines made an 'unscheduled' maiden profit last year after US marketing spend was pared whilst low wine stocks were replenished. However, it is now expected to move back into the red for the current financial year 'with an EBIT performance also approximately £2 million lower than expectations'.

Funding independent winemakers to make exclusive wines at preferential prices which are passed onto Angels, Naked is still expected to be the future growth engine for Majestic Wine.

In a show of confidence, Gormley insists Majestic is still on track to resume dividend payments this year and achieve his bold £500 million sales target by 2019. 'It is very disappointing that two isolated factors are distracting from the great progress across the rest of the group,' he comments.

Majestic Wine - Sept 2016

'We have always said that we would adopt a test and learn approach, and be quick to redeploy capital from underperforming areas, which is exactly what we are doing. While, this approach is delivering good results in the other business units the scale of the US market means that even a test can have a material effect on profits,' Gormley continues.

The wine sector innovator insists 'the turnaround plan in Majestic Retail is progressing well, the key initiatives are on track to be delivered on time and on budget, and preparations for peak Christmas trading are well in hand. Naked Wines UK, Australia and the underlying US business continue to trade well, and we have managed to restore Lay and Wheeler (Majestic's specialist fine wine merchant) to growth.'

Issue Date: 21 Sep 2016