UK Edition
Questor: buy Majestic – its retail stores are recovering and the online arm is growing fast
Investors may be inclined to give any retailer a wide berth at the moment as the threat from online competitors remains intense. But one, at least, appears to have a formula for growth.
Majestic Wine is most familiar for its superstores, which are recovering well after some difficult years. But less well known is its online business, Naked Wines, which is growing quickly both in Britain and overseas.
The two parts came together when Majestic bought Naked Wines in 2015. As part of the deal it also acquired an entrepreneurial boss in the shape of Rowan Gormley, whose talent was spotted in the Nineties by Richard Branson – Gormley helped to get Virgin Money off the ground and later worked at Virgin Wines.
“Gormley might have concentrated on Naked and given up on Majestic’s bricks-and-mortar operation as impossible to turn around in the current environment, but he set about solving its problems too,” said Thomas Moore, who holds the stock in his Standard Life Equity Income Trust.
Among Gormley’s initiatives were scoring each store on measures such as customer and employee retention, and product availability, and hiring enthusiastic and knowledgeable staff. He also improved the use of data-led marketing and “made the experience fun” through initiatives such as wine tastings, Moore said.
As a result, the retail stores have now achieved eight consecutive quarters of like-for-like sales growth. “The retail arm is pretty mature but generates a lot of cash,” Moore said. “One of Gormley’s jobs is to decide where to reinvest this cash. He has put some in the stores themselves but has also invested in the growth of Naked Wines.”
This online business operates on a subscription model: customers pay at least £20 a month and are offered wines typically priced at about £10 a bottle, which thanks to the tax regime is in the “sweet spot” for value and quality, Moore said.
“It is in effect a stand-alone business – Naked has its own family-run vineyards and cultivates new wine growers,” he added. “This helps to generate loyalty among customers, who feel they are part of an ‘incubator’ for start-up vineyards.” Naked is now larger in America than in Britain, partly because Prohibition-era distribution practices in the US favour its business model.
It is also growing well in Australia, where annual sales growth in the three months to Dec 31 2017 was 33pc (the figure for America was 13pc).
Moore said the group was hard to value as a whole, given the different models of its component businesses (it also owns a commercial arm and a high-end wine merchant).
An overall price-to-earnings ratio of 18 “doesn’t scream buy”, he said. But a “sum of the parts” valuation approach that applies a “conservative” multiple to each of the individual businesses results in a share price of more than 500p, he added. This compares with a current price of 390p.
“And one day Gormley could decide to demerge Naked Wines to take advantage of the crazy valuations that some online retailers get,” he said.
Another attraction is that Gormley owns 6.1pc of the company. He earns a relatively low base salary of £222,000, so his principal reward is via his shareholding, Moore said, giving him an incentive to deliver for all investors.
Questor says: buy
Ticker: WINE
Share price at close: 389.5p
Update: 4imprint
When we tipped 4imprint, the Aim-listed but US-focused supplier of promotional goods, we said it should be able to start to pay special dividends because a cycle of capital expenditure had ended and cash was expected to build up on the balance sheet.
So it proved: the group announced a special of 43.17p a share earlier this month, in addition to an ordinary dividend of 42.58p. The shares did not react well, however. They fell by almost 10pc because the market seemed to dislike the firm’s plan to spend more on marketing.
But the market got it wrong, according to Fraser Mackersie and Simon Moon, who hold the stock in their Unicorn UK Income fund.
“The company has always said it will spend more on advertising when economic conditions are right,” they said. “The market saw this extra spending simply as a cost but we think it will have a payback. For us, the investment case has actually strengthened and we topped up our holding on weakness.”
Questor says: hold
Ticker: FOUR
Share price at close: £17.70