Majestic drops profit projections by £4m

Majestic Wine has launched an internal review after warning that its profits could drop as much as £4m below expectations for the 2016/17 financial year.

CEO of Majestic Wine, Rowan Gormley, in Majestic’s Mayfair store

Releasing a trading update this morning, Majestic Wine said that sales within its commercial business, which supplies to businesses, were not growing sufficiently, with investment in business development reducing its profit growth to just 1% for the year.

“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 £2m lower than expectations”, said Majestic.

An internal review is now underway to find a more “profitable approach” to its commercial operations.

Adding to difficulties within its commercial arm, Naked Wines USA, which launched last year, was forced to shelve a direct mail campaign to recruit ‘Angels’ in the country. However the high cost campaign resulted in fewer customers than hoped, with Naked Wines now expected to make a loss for the current financial year.

“We have now stopped this investment, but the short term impact will be higher costs in the first half of the year, with fewer new Angels acquired than hoped also impacting profits over the next 12 months”, said Majestic.

“Accordingly, we now anticipate that the Naked Wines business will move back into making a small loss for the current financial year with an EBIT performance also approximately £2m lower than expectations.”

Overall, Majestic now expects that its pre-tax profits for the year will be £16.1, some £4m below initial expectations. Despite a somewhat gloomy outlook for the coming year Rowan Gormley, who founded Naked Wines and took over as CEO of Majestic after its sale to the company in 2015, was upbeat for the future, maintaining that its three-year plan to deliver £500m in sales by 2019 was still on track.

“It is very disappointing that two isolated factors are distracting from the great progress across the rest of the group”, he said. “We have always said that we would adopt a test and learn approach, and be quick to redeploy capital from under-performing 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 noted that Naked Wines UK and Australia “continue to trade well” and highlighted a return to growth for Lay and Wheeler – Majestic’s fine wine arm. Sales for the year ended 28 March 2016 were £10m.

Releasing its end of year results for 2015/16 earlier this year, Majestic Wine reported “encouraging” progress after seeing its first positive performance in four years. The company reported group sales up 41.3% to £402.1m, but profits were hit by last year’s acquisition of Naked Wines, which reduced the profit before tax by 74.5%, from £18.4m to £4.7m, largely because of an £11.5m non-cash charge associated with the acquisition.

A further update will be given on 17 November when the group’s interim results will be released.