Retailer Majestic Wine (WINE:AIM) has uncorked an unexpected strategy change that is unsettling investors and sends shares in the Watford-headquartered quality wine specialist down 9.4% to 245.5p. Ramping up investment behind Naked Wines - which will become the group’s new moniker - Majestic is also mulling over options including store closures or the wholesale disposal of its legacy retail business and will also review the dividend in June.

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Rowan Gormley-led Majestic is to focus its efforts and investment on Naked Wines, the international online wine business acquired in 2015, whilst releasing capital from its Majestic Retail and Commercial operations, a move that necessitate store closures and/or asset sales.

NAKED AMBITION

Today, Majestic announces an additional £6m per annum of new customer investment in growth engine Naked Wines, up from around £20m a year currently to £26m in full year 2020 and continuing to grow ‘for some years thereafter’.

Although Majestic will hit its £500m sales target for the year ending 1 April 2019 and expects adjusted pre-tax profit for the year ‘to be around’ the current £11.1m consensus level, it also flags restructuring charges (largely non-cash) of up to £10m will scar the full year 2019 figures. Further restructuring charges are likely to be incurred from full year 2020, although ‘any cash outflow is expected to be largely offset by cash inflows from asset sales’, insists the company.

DRAMATIC DIVIDEND IMPLICATIONS

Besides rising investment costs and restructuring charges, some investors are unhappy about the implications of the strategy shift for the shareholder reward. Majestic, which will be renamed Naked Wines to reflect the focus on a single brand, serves up the news it will review the dividend in June 2019 ‘in light of the increased investment levels in Naked Wines and the combination of transformation actions to be undertaken.’

Since acquiring Naked Wines in 2015, Majestic Wine has morphed into a business generating almost 45% of its sales online and over 20% internationally; Gormley sees significant growth potential for Naked Wines in the US in particular. At the same time, the legacy Majestic retail business has struggled amid weak consumer confidence and cut-throat competition in a highly promotional UK market.

STORE CLOSURES LOOM

Gormley (pictured below) comments: ‘It is clear that Naked Wines has the potential for strong sustainable growth, and we will deliver the best results for our shareholders, customers, people and suppliers by focusing all our energies on delivering that potential.

‘We also believe that a transformed Majestic business does have the potential to be a long-term winner, but that we risk not maximising the potential of Naked if we try to do both. Where we have no choice but to close stores we will aim to minimise job losses by migration into Naked. Therefore we have taken a decision to focus all of our capital and energies into delivering the long-term potential of Naked, and releasing value from Majestic.’

THE ANALYSTS’ VIEW

Shore Capital (SGR:AIM) has placed its forecasts and recommendation under review following these seismic developments, explaining: ‘The statement suggests that the restructuring costs from exiting the retail stores will look to be recouped through asset disposals. In our view, the statement lacks the fine detail about the magnitude, likely timeframe or potential costs of the proposed store closures. The commentary around the dividend policy being reviewed and ongoing restructuring costs may be taken badly by the market this morning.'

Liberum Capital says ‘a drastic and unexpected change in strategy leads to cuts to forecasts from full year 2020 onwards. Pre-tax profit for full year 2019, before restructuring costs, should come in line with the circa £11m consensus. We know investment in Naked is to rise by £6m in full year 2020 and then by more thereafter. If this investment can consistently be invested at a sustainable return on investment (ROI), then this is a good thing but we wait to know if the new digital channels the group is targeting are generating the same, or better, returns than vouchers and other routes that have been primarily used historically.

‘The sale of Majestic, or site closures is a complete change and this could have material impacts to the balance sheet, and dividends – quite a change in tone and strategy since the capital market day (CMD) last year. We now assume no final dividend for full year 2019 due to timing of the transformation programme but one should view the outer years at risk.'


Issue Date: 25 Mar 2019