Majestic Wine warns earnings may take £3 million hit on back of investment plans
Its 2019 underlying earnings will fall £2 million to £3 million compared to 2018.
Majestic Wine has warned that fresh investment plans meant to attract new customers will knock next year’s profits by up to £3 million.
The company said it was already investing around £12 million a year in attracting new customers, but that new information showed the investment opportunity was “materially bigger than previously thought”.
The group now believes that is a chance to double new customer acquisition from current levels, and is already seeing higher returns.
Majestic Wine plans to invest an additional £9 million to £12 million over the 2019 financial year, which will mean taking a £2 million to £3 million hit on adjusted underlying earnings compared to 2018.
Analysts are currently expecting 2018 earnings – covering the 12 months to April 2 – to come in at £17.9 million, against revenues of £484.3 million.
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 Majestic Wine CEO Rowan Gormley
Majestic defended the move, saying returns on its investment would be anywhere from £48 million to over £80 million per year – with significant benefits expected to be seen from full year 2021 onward.
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 full-year 2018.”
He said that in the last three years the company had doubled sales at Naked Wines and logged profits across its markets after ramping up investment.
Mr Gormley assured Majestic could double investment again while maintaining returns.
“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,” he added.
Majestic shares were down as much as 3% at the start of trading, but later edged into positive territory.
Shore Capital Markets analyst Phil Carroll said that overall, it was a “reassuring” update from Majestic Wine given the “well-documented travails of a number of retail businesses recently”.
“We suspect the increased investment plans may get a mixed reception by the market initially but we look forward to getting more detail from management in the capital markets day later on.
He added: “The logic management put forward with its updated strategy in today’s announcement makes sense to us on face value.
“However, we suspect it may take the market some time to fully absorb and clearly getting comfortable with management’s justification of the bigger market opportunity is going to be key (this includes ourselves too).
“Therefore, whilst our forecasts are going to see a hit to growth in the P&L next year, it should result in strong growth and value creation going forward.”