Majestic Wine profit warning sends share price plummeting

21 September, 2016

A poor performance from Majestic’s B2B arm and from Naked Wines USA has led to the group delivering worse than expected profits, a trading update has revealed.

Majestic is conducting an internal review in a bid to turn around the performance of Majestic Commercial, which sells wine to a wide range of businesses.

This division’s performance is £2 million lower than expected. Sales growth is flat year on year and the gross margin percentage achieved on those sales has declined by around 200 basis points.

Majestic said the first half of the current financial year has proved to be even more challenging than expected.

The other segment of the business holding it back is Naked Wines USA, which is also £2 million worse off than expected.

Delivering the profit warning ahead of interim results to be announced in November, the group said: “In our annual results we also explained that Naked Wines had made an ‘unscheduled’ maiden profit last year following a decision to reduce marketing in the USA whilst low stock levels were replenished.

“During the first half of the current financial year, improved stock levels have meant that we were able to resume our investment in acquiring new customers in this region.  

“The decision was taken to accelerate a number of initiatives, including testing a significant new direct mail campaign. It is now clear that, whilst most initiatives were successful, the direct mail campaign was not.

“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.

“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.”

But Majestic’s retail division, Naked Wines UK and Australia and fine wine business Lay & Wheeler are all performing well, the group said.

It added that it is still on track to hit its three-year plan of £500 million in sales by 2019.

Chief executive Rowan Gormley said: “It is very disappointing that two isolated factors are distracting from the great progress across the rest of the Group. 

“We have always said that we would adopt a test and learn approach, and be quick to redeploy capital from underperforming 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. 

“The turnaround plan in Majestic Retail is progressing well, the key initiatives are on track to be delivered on time and on budget, and preparations for peak Christmas trading are well in hand. Naked Wines UK, Australia and the underlying US business continue to trade well, and we have managed to restore Lay and Wheeler to growth.

“Despite these two factors, I am pleased to say we are still on track to resume dividend payments this year and to deliver our goal of £500m sales by 2019.  We look forward to giving more details at our interim results in six weeks’ time.” 

Despite Gormley’s upbeat message Majestic’s share price plummeted 25%.

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