Majestic ‘past tipping point’, but profits down

Majestic is ‘past the tipping point’  both financially and operationally, CEO Rowan Gormley said today as the retailer reported double digit sales growth – but profits for the year still took a hit.

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

The wine specialist saw sales rise 15.8% over the reported 53 weeks to £465.4 million, boosted by a far strong second half.

Its concentration on boosting customer loyalty paid dividend, as part of the return to form was driven by an increase in its active customer base, up 12% overall to around 852,000 customers. Majestic Retail saw customer numbers up 7%, with Naked Wines boosted by a 21% growth in its customer base.

Chairman Phil Wrigley pointed out that the boost in customers had resulted in eight consecutive quarters of like for like sales growth at Majestic Retail, of 5.7%, with underlying sales growth rose 5.4% to £258.5 million. Meanwhile online growth was strong, now accounting for more than half of the group sales, at around 56%.

However profit before tax across the group fell £1.5 million on the back of the costs related to the Naked Wine acquisition, one-off costs and the revaluation of foreign exchange. This came after a disappointing first half and a profit warning in September that cut its annual pre-tax profit expectation by £4 million to around £16.1 million. Gross margin also fell by 0.7pps, which the company attributed to “Brexit-related currency impacts”.

Although the impact was smoothed by hedging and pricing was adjusted to recover margins, Gormley pointed out the impact on price not only had a short-term impact on margin but was also likely to have a longer-term impact on demand, and impact Majestic’s Calais operation.

The adjusted profit before tax for the year was £12.9 million, but the company pointed out that the transformation costs were now fully annualised and the benefits were starting to come through. Gormley also pointed out that the adjusted EBIT in the second half of the year was 51.0% higher year-on-year, driven by the improved customer base.

Naked Wine sales grew 26% overall, boosted by strong growth in its customer base in the second half of the year, up 21%, taking its return on investment up 139% in the second half, or 83% overall.

Majestic’s fine wine business Lay and Wheeler was also on an upward trend  after “years of languishing in the doldrums”, with sales up strongly at 36.2% helping to turn “a small profit into a meaningful contribution to the group bottom line”.

International sales were up 52.7%, to £88 million.

Mixed year

Gormley admitted it had been a “mixed year”, but that overall the company was in better shape as it moved into a lower risk, lower investment phase of its transition.

“Operationally, we are through the most risky and cost intensive phase of our transformation plan. Together these mean we have a business that is better able to weather the uncertain trading environment, with a sustainable growth model, the big strategic questions answered, a better paid and rewarded workforce and more effective systems and processes,” he said.

“There is still a lot to be done, but we are a better business today than we were 18 months ago, when we started our transformation plan,” he said. “And we need to be, because UK retail is likely to be in for a rough ride, with downward pressure on demand, due to falling household incomes and upward pressure on prices.”

He added that although the company was still on track to achieve its sales target of £500 million in 2019, this was assuming “that there is no further deterioration in trading conditions and no exceptional fallout from Brexit.”

“I wish I had a crystal ball to predict what the outcome might be, but in the absence of that, all we can do is stick to our transformation plan,” he said.

Shore Capital analyst Phil Carrol said the investment it Majestic’s core business rather than adding bricks and mortar stores, has result in a “robust” retail division in a challenging market.

“Majestic is now in a more robust position with a consistent record of positive like-for-like sales growth in the Retail division and strong growth in revenue in Naked Wines,” he said, adding that Lay and Wheeler was starting to make “a more meaningful contribution” to the group performance and the Commercial division was showing signs that it had stabilised.

The board also announced that Chairman Phil Wrigley is to step down in August, to be replaced by Greg Hodder, who joined the business from Charles Tyrwhit two years ago, and it has appointed Ian Harding as a senior independent director.