Page 9


The case for Majestic Wine Listed for nearly fifteen years and with a market capitalisation around £300m, Majestic Wine is an AIM blue-chip. What opportunities do recent share price falls present? Ten years ago, Majestic Wine ran 115 stores and made total sales of £148m for the year. Pre-tax profits were £10.7m. Today, the company has more than 200 stores in the UK and plans to eventually reach 300. Majestic is a great AIM success story. Since 1998, the company’s dividend to shareholders has increased in every year but one (when it was held). Sales for 2013 reached £274m and the company made a pre-tax profit of £23.6m.

more than 200 stores in the UK Majestic Wine’s sparkling success earned the company a premium stock market rating. However, a recent trading statement from the company confirmed that the next set of fullyear results will show profits broadly in line with the last twelve months. This caused the shares to fall 20% over the course of a few trading days. When such a popular and successful stock suffers a setback on this scale, the investment proposition deserves reappraisal.

To do that we must revisit the company’s trading statement from March 20th. Here, the company reported decent sales growth leading up to Christmas followed by ‘challenging conditions’. Further information in the announcement suggested that Majestic is now struggling to support future expansion. More investment in office space and larger distribution facilities are being planned. These costs will hold back earnings growth in the current financial year.

investment proposition deserves reappraisal One year ago, analysts were forecasting 2014 EPS of 30.1p per share. The March profit warning has seen this figure fall to 26.9p. The 2015 forecast is for EPS of 27.8p. As a result, Majestic Wine shares still trade on a premium P/E. To decide whether this is deserved, we need to make a call on the long-term prospects of wine retailing. First, we can expect more sales to move online. Despite its large network of stores, this is not necessarily bad news for Majestic. The stores give the company customer recognition, point of contact and brand strength. The bricks and mortar presence complements any online offering. There are signs that this is already playing out. The interim stage saw Majestic report 8.3% online sales growth. With a case of wine being so heavy, many customers will prefer to collect than pay postage. My concern is that just as wine

became very fashionable in the last decade, its popularity could turn. Rarely a month goes by without publication of a worrying study on the long-term effects of regular alcohol consumption. Add the growing trend for a post-Christmas ‘dryathlon’ and we have a scenario whereby future growth could be significantly curtailed. To the bear case add the growth of upmarket retailer Waitrose, which has now added free delivery to its offering.

costs will hold back earnings growth The shares have made up much of the ground lost following the profit warning. While economic recovery will help consumer confidence, Majestic’s premium rating now looks at risk. Majestic Wine (LON:MJW) FOR Successful market-leader Business still growing AGAINST Expensive given reduced growth forecasts Increasing regulatory risk to alcohol sales Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£308m 467p:471p 17.4 3.4% 380p:590p


May 2014 AIM Prospector  
May 2014 AIM Prospector  

Featuring Blavod Wines & Spirits, Bond International, K3, Majestic Wines and WYG.