Shares in Majestic Wine (WINE:AIM) have slumped 7.7% to 293.5p in early trade on Thursday despite progress on the sale of its physical stores.

Alongside in line full year results the £213m wine seller confirmed ‘advanced discussions’ with ‘multiple bidders’ as it seeks to sell its retail and commercial arms and focus on the faster growing online sale of wines through its Naked Wines digital business.

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Surging spend on new online customers seems to be the main worry for investors, although suspending the dividend as the impending sale process of its physical stores operations drags on doesn't help, even if that was largely anticipated by the market.

The surprise resignation of highly-regarded chairman Greg Hodder has also added to the unease.

SHARE PRICE FIZZ SUBSIDES

Back in March Majestic Wine stunned retail industry watchers and investors with news of a radical transformation plan. This involves ditching a physical shops presence entirely to become an online-only operation. This will require a significant ramping up of investment behind the online Naked Wines business.

Shares in the Watford-headquartered company fizzed higher yesterday on reports that activist fund Elliott Advisors had launched a bid for the wine purveyor’s 200 bricks-and-mortar outlets, with former Comet owner OpCapita also thought to be in the running to buy its store network.

However, a complex and confusing results statement for the year ending 1 April leaves a bad taste with investors today. While group revenues rose 6.3% to £506.1m, group adjusted pre-tax profit fell 34% to £11.3m due to accelerated investment in Naked Wines and lower profitability in the retail business, where margins are under pressure amid cut-throat competition.

Majestic Wine also suspends the final dividend, which will be replaced with a special dividend equal to last year’s 5.2p payout, but only if it successfully completes the sale of the legacy Majestic businesses.

THE FUTURE IS NAKED

Sales growth at Naked Wines, whose customers crowd fund independent winemakers in exchange for preferential prices on exclusive wines, accelerated to 14.5% last year, up from 11.3% in full year 2018. Encouragingly, sales bubbled up 21% in the US, now Naked’s biggest division.

While Naked Wine’s investment in new customer acquisition is proving highly effective, as it finds more customers who spend more with the business each year, this growth is coming at heavy cost. New customer investment surged by £5m to £19.1m last year and is set to rise to £26m in the current year.

Investors are unsettled by the surprise resignation of Majestic’s well-regarded chairman Greg Hodder. But the positive news is Nick Devlin, President of the US Naked Wines business, will join the board as chief operating officer (COO) and former Home Retail boss John Walden, a seasoned retailer with significant US market experience, is to take Hodder’s place in the chair.

THE EXPERTS’ VIEW

Liberum Capital explains: ‘If the sale of Majestic is not concluded before Christmas, then this process will be resumed in 2020. However if Majestic is sold, then management commit to pay a special dividend equating to 5.2p the level of the full year 2018 dividend.

‘We would have thought shareholders would receive more so we question if this means the group intends to invest significantly more into acquisition spend than we currently forecast? The group has yet again not provided clarity on how the digital channels are performing for Naked and this is very much required considering the increase in customer acquisition to £19m in full year 2019 and to £26m in full year 2020 and it is in digital that a large portion of the additional customer spend is going.’

Russ Mould, investment director at AJ Bell, says: ‘We’re told the wheels are in motion for Majestic Wine’s legacy shops business to be sold, leaving the group as an online-focused entity called Naked Wines. But is that really the right move?

‘There are disadvantages to being an online business with wine. Aside from potential breakages during customer deliveries, you lose the interaction with customers in the shop.

‘Majestic has developed a good reputation for having knowledgeable staff who are happy to make suggestions to customers visiting stores and there are also the sales benefits that come with wine tasting sessions. That type of connection would be lost by going online-only.

‘The Naked Wines operation also seems to be spending a significant amount of money trying to attract new customers. In the past financial year it spent £19.1m on “new customer investment” which equates to 9% of the value of the whole company including the Majestic business.

‘It believes it will make £4 for every £1 it spends on such investment over a 20-year period. There do not appear to be many barriers to entry for setting up an online wine-ordering business and so competition could be a major issue for the group in the future, affecting its ability to hang on to customers.

‘The wording around the sale of the Majestic business also seems a bit worrying. The fact it is flagging contingency plans if it cannot complete the sale during the summer – i.e. have another go in 2020 – would suggest it is far from a done deal.

‘And shareholders are likely to be a bit miffed that they will only get the equivalent of the final dividend from the 2018 financial year as a payoff if Majestic is sold, rather than a bumper one-off payment. In fact, they won’t get a final dividend for the 2019 financial year at all if the business isn’t sold.’


Issue Date: 13 Jun 2019