Majestic Wine sacrifices earnings to boost customer numbers
Majestic Wine has warned that earnings will be cut by up to £3 million as it has decided to invest in acquiring new customers for its Naked Wines arm.
The group’s shares wobbled slightly after the announcement, but rallied to trim losses to just over 2%.
It said that the opportunity to invest in new customer acquisition is “materially bigger than previously thought” and it plans to pup an extra £9 million to £12 million into this venture.
That will cut earnings before interest and tax for the 2019 financial year by between £2 million and £3 million, but it believes it will reap the benefits afterwards.
Chief executive Rowan Gormley said: ““We are in the fortunate position of having the option to accelerate growth by investing in new customer acquisition.
“We are starting from a good place with the core business on track to meet our 2019 sales target of £500 million and the market’s expectation for profits and dividend in FY18.
“In the last three years, we have doubled sales at Naked Wines and delivered profitability in all three markets [the UK, US and Australia] after increasing investment in new customer acquisition.
“We believe we can double the level of investment again while maintaining the returns, driving sustained growth in shareholder value.
“On a risk / return basis, the case for accelerating investment is clear. We can measure success in months while delivering returns over years.
“This is the right thing to do to maximise shareholder value.”
In November, Majestic announced it had grown first-half adjusted profit before tax to £6.8 million on the back of strong sales in its Naked Wines division.
Naked was profitable in the UK, the US and Australia and posted adjusted earnings before interest and tax of £4.7 million, compared with a loss of £2.8 million in the previous year.
That was seen by analysts as a turning point for the group, after a couple of years of uninspiring results while Gormley overhauled its strategy.
Analysts at Peel Hunt were encouraged and intrigued by today’s announcement.
“The switch to a more digital bias to the marketing has had highly positive results to the extent that management has sufficient confidence to press the invest hard button again,” they said.
“Whilst the caveats that investments have had the odd blip in the past, we think that Majestic has learnt its lesson and has clear visibility on returns. The investments look likely to bring about an exciting medium term growth trajectory here, in our view.
“It appears a clear ‘buy’ to us, especially after a weak run for the shares.”