UK Edition
Questor: Majestic’s transformation is a shock but we’ll hold while we see what form it takes
Questor share tip: the wine retailer is to focus on its online arm and the store chain will be sold or slimmed down. What will this mean for shareholders?
When we tipped Majestic Wine in March last year we said both the traditional retail shops and the Naked Wines online arm were trading well. Things have moved on significantly since then and we must decide whether we also need to change our stance on the stock.
In a trading statement for the Christmas period, Majestic said sales over the group as a whole were still growing well and overall margins were rising. But it admitted that the market was “challenging” for its bricks and mortar shops.
While sales from stores rose by 1.5pc compared with the previous festive period, gross margins were 1.2 percentage points lower “in a very price promotional market”.
This perhaps set the scene for a much more surprising announcement last month, when the company said it would in future devote its energies to developing Naked Wines, which is growing rapidly, especially in America.
While it said it still saw the potential of “a transformed Majestic [retail] business to be a long-term winner”, it warned that it risked “not maximising the potential of Naked if we try to do both”.
A radical restructuring will therefore take place. While we will not know the details until full-year results are announced in June, the essence is that capital will be released from the retail stores arm and reinvested in Naked.
Thomas Moore, whose holding of Majestic in his Standard Life Equity Income Trust prompted our tip, said: “Majestic stores are continuing to perform well, so management claim to be making this strategic pivot from a position of strength.
“They will spend the next three months considering all their options. These include totally exiting Majestic via a trade sale, from which proceeds would be invested back into Naked with any surplus returned to investors, a partial sale and migration of the best stores into Naked, or a partial sale and then running the business off.”
He pointed out that Majestic leases were relatively short, so the costs of closing stores should be low. “They have freehold and no pension liability, so any one-off exceptional charges should be kept to a minimum,” he said.
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
But Moore added that the market was “nervous” about the shift in strategy, which “carries execution risks”. The shares fell sharply after the announcement and stand 43pc below where we tipped them.
“There is a lot of affection for the Majestic brand and investors are not as convinced about the potential of Naked Wines as the chief executive [Rowan Gormley, who ran Naked until Majestic bought it] appears to be,” the fund manager said.
“Much now depends on their next move – whether and at what price they sell the Majestic store base or whether they can evolve some of the stronger stores into Naked Wines showrooms.”
He added that transforming the group into a high-growth online business was risky as the growth would require upfront investment that “will dilute near-term earnings forecasts, demanding investors to lengthen their time horizons”. However, if investors could be persuaded, the shares could get a “meaningfully” better valuation, Moore said.
“The scale of the US opportunity, coupled with the fact that Gormley’s personal wealth remains tied up in the stock, gives some reassurance that he will ultimately deliver for shareholders.”
Moore is holding on until investors hear more in June and we will do the same.
Questor says: hold
Ticker: WINE
Share price at close: 219p
Update: Sports Direct
Sports Direct is much in the news at the moment because of its stake in Debenhams and its failed attempts to prevent the beleaguered chain from going into administration, wiping out all shareholders.
This column advised readers to sell Debenhams in January 2017 so they will be more concerned about the effect of recent events on Sports Direct, in view of our buy tip in November 2016.
Naturally we dislike the distraction that Debenhams represents and suspect that Sports Direct’s rescue attempts were a case of throwing good money after bad. None the less, we are reassured by the fact that Phoenix Asset Management, whose exhaustive research process underlay our original tip, retains a large stake in its funds and recently bought more stock.
Questor says: hold
Ticker: SPD
Share price at close: 283.8p
- Questor archive: telegraph.co.uk/questor
For the best of the Telegraph's investment analysis, advice and expert opinion, sign up to our weekly newsletter.