Majestic Wine Warehouse - not a sell after all?

Monday, Nov 02 2009 by
1

Whether or not you've done well out of this year's rebound in the stock markets, there's no doubt that most people are cutting back – tightening their belts and learning to make do with less. A staycation instead of a holiday in Tuscany; Primark instead of Marks & Sparks; and a bottle of fizzy cider instead of a magnum of champagne.

So it's no surprise that Majestic Wine Warehouse is selling less champagne – a quarter less than last year, in fact. Surely, that makes this stock the biggest sell on the market?

Well, let's reserve judgment on that for a bit and look at the company's recent performance. 2008 saw the first dip in Majestic's profits since it was floated in 1996. The half year saw profit before tax fall by 25%, though total sales crept up 3.4% (largely as a result of store openings rather than organic growth; like-for-like sales  in the five weeks coming up to the results fell by 4.7% [1] .

Full year profits for the year to March 2009 fell 56% - though £5.3m of this was due to a one-off writedown on the value of the French business, Wine and Beer World, which had been hurt by the strength of the euro. (This business addresses the 'booze cruise' market – always highly price sensitive.)

In fact the results weren't that bad once you exclude the one-off item. Pre-tax profits still fell by 22% - but that showed the second half of the year actually improving on the first half, with the decline decelerating. Christmas 2008, in particular, seems to have been a pretty good season, with a 25% rise in sparkling wine sales making up for the champagne shortfall [2] .

The new financial year started well, too, with like-for-like UK sales rising 2% for the ten weeks from 31 March to8  June 2009 [3] .

So far, so good – this is not a retailer in trouble, but just a retailer having a sub-standard year. What has Majestic got that makes it interesting to the investor, then?

Well for a start, it has a fantastic market presence. It has 150 outlets in the UK, but it certainly hasn't saturated the market; it's opening 5-10 stores a year and could probably open more if it could find the right sites. Plus, it has a huge database of 418,000 active customers – spending an average £133 per transaction [4] .

Of course, it's competing with the supermarkets, which are offering increasingly large ranges of wines and spirits. However, its service – including tastings – is something that supermarkets can't replicate;  all Majestic staff are put through the Wine  and Spirits Education Trust exams, and many go on to diplomas. This year, Majestic has started offering 'wine uncorked' courses for customers, which explain the basic types of wine and grape varieties, and demystify wine terminology. Again that's something you won't get at Tescos, and it's bringing people into the stores.

Majestic is trading in the relatively more resilient middle to top end of the market, rather than selling plonk, which is far more price-sensitive. Mid-level wines are less easy for the supermarkets to compete on, because they're not amenable to a volume driven purchasing policy. It's worth noting that the average bottle price has actually gone up to over six quid - £6.35 vs £5.98 [5] , and the company claims its market share has remained steady despite supermarket offers [6] .

Online sales have also done well for Majestic – at the half year, online sales were 11% up, and by the full year they had risen 16%. That's just over 9% of the group's total UK retail sales [5] .

But it's not just on the marketing side that Majestic has done well. Its clever sourcing has helped it keep costs under control. European wines are now looking dear, with euro strength against sterling, so the company has started to source more from the New World. In fact it's now selling more New World wines than French wines,  and expects them to account for more than half the turnover within the next five years [7] .

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My interest in the company was stimulated by the recent announcement that Majestic would break with its traditional strategy of only selling a full case at a time, and halve the minimum purchase from 12 to 6 bottles. It's fair to say that the company has done its research on this one properly – the new offer has been trialled for a year in two stores at Newcastle and Darlington [8] , so this isn't a knee-jerk reaction to supermarket price pressure or recession.

Investec analyst Natalia Marisova is one of the fans of the change. She's been quoted as saying the new minimum would widen the group's appeal at "no detriment" to customers looking to buy 12 bottles or more. She pointed out that half the company's customers only visit once a year, so there is scope to increase the frequency of customer purchases – probably increasing the total annual sales even though the per-transaction amount will decrease [9] .

Looking at the group's track record, it's a good performer – showing revenue increases every year for the last five years, and EPS up every year till last year, when it fell 20%. It appears to be a fairly tightly managed ship, then. In fact that's a better record than I'd expect from a business which is so highly seasonal, with revenues hinging on the festive season.

Steve Lewis, the CEO, joined the graduate recruitment scheme at Majestic in 1985 and he's been with the group ever since. Again, the group gets points for management continuity – it's not long since the founder stepped down.

Growth has been organic, for the most part, with few acquisitions. Majestic acquired wine merchant Lay & Wheeler last year, for £4.2m – that should give the company a little more exposure to the top end of the market – but apart from that, and Les Celliers de Calais which was bought in 2001 as the basis of the French business, it's been pretty much organic all the way.

Trading at a historic PER of 11, Majestic's currently valued at a slight discount to the sector average for food and drug retailers (13x). Its historic yield is 4.7% - though it's possible management might decide to trim the dividend this year, with the dividend nearly one and a half times covered, and gearing at only 14%, there's certainly be some income for shareholders. (Last year the dividend was maintained at both interim and final stages despite the collapse in profits.)

None of that makes this a stand-out buy. Nor does net asset value per share, at just 62p against a 216p share price.

But what is interesting is that Majestic has traditionally traded at a premium to its sector. In fact the first time I looked at the stock, it was just too highly valued for me to add it to my portfolio. It's always taken knocks like last year's to put the stock on a PER where value investors might be tempted in.

Alas, Majestic is already up 42% this year, so I might have missed the boat. But it still looks unassumingly valued, both compared to its sector, and compared to its traditional higher ratings.

The Investor's Chronicle has the stock down as a sell, apparently [10] . Now it's been noted before by others that the Investor's Chronicle often gets it wrong – chasing yesterday's story rather than looking at what's going to happen in the future. I'll be hoping that this maxim also applies in this case!


[1] BBC News, 10 November 2008: http://news.bbc.co.uk/2/hi/business/7720331.stm
[2] The Scotsman, 9 January 2009: http://thescotsman.scotsman.com/business/Market-sees-sparkle-in-Majestic.4859155.jp
[3] Preliminary report: http://maj-cms.snowvalley.com/upload/pdfs/Investors/results2009.pdf
[4] Preliminary Report
[5] Preliminary report
[6] City AM, 16 June 2009: http://www.cityam.com/news-and-analysis/yyv77668ei.html
[7] Bloomberg, July 10,. 2009: http://www.bloomberg.com/apps/news?pid=20601102&sid=aVM.b5LUtJho
[8] The Herald, 2 September 2009: http://www.heraldscotland.com/majestic-wine-halves-minimum-purchase-1.917659
[9] The Independent, 2 September 2009: www.independent.co.uk/.../make-mine-a-half-majestic-cuts-minimum-purchase-of-wine-1780329.html 
[10] Investors Chronicle, 16 June 2009: http://www.investorschronicle.co.uk/Companies/ByEvent/Results/Analysis/article/20090616/95d2977a-59ba-11de-bbc4-0015171400aa/Majestics-crown-slips.jsp


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Majestic Wine PLC is a United Kingdom-based holding company. The company is engaged in the business of retailing of wines, beers and spirits. Majestic Wine Warehouses is a wine retailer, Lay & Wheeler is a specialist in the fine wine market and Majestic in Calais operates retail units in northern France servicing the United Kingdom cross-channel market. The Company has opened 16 new stores in Northallerton, Esher, Queensferry Road in Edinburgh, Witney, Basingstoke, Falmouth, Stroud, Ludlow, Uttoxeter, Alton, Sudbury, King’s Lynn, Lymington, Dorking, Crawley and Gerrards Cross. more »

Share Price (AIM)
390.25p
Change
-9.8  -2.4%
P/E (fwd)
14.0
Yield (fwd)
4.2
Mkt Cap (£m)
262.5



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About ragtrader

I'm not just a rag trade investor - basically any company that sells to the consumer is one I'm going to look at. Stocks I've enjoyed holding include Majestic Wine, Sci Entertainment (before it bought Tomb Raider!), Greene King and GUS - quite a range, though alcohol seems to be something of a strong suit! When I'm not investing, or writing about it, I am a coloratura soprano, but my operatic career has so far been limited to my own bathroom. more »



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