Shares in Majestic Wine PLC (LON:WINE) slumped in late-morning Thursday after it swung to a loss in its first half as the investment in its growth strategy and a sluggish UK market ate into its earnings.
The AIM 100 wine seller reported a pre-tax loss for the period of £0.2mln, down from a £3.1mln profit last year despite revenues climbing 5.4% to £229.1mln.
READ: Traders pour into Majestic Wine as RBC toasts “deeply-undervalued” Naked Wines business
The interim dividend was maintained at 2p per share while net debt shrank to £20.1mln from £25.6mln a year ago.
Revenue and earnings drops across the board
In its segments, the firm reported revenue growth in its Retail and Naked Wines divisions, which grew by 1.9% and 14% respectively, although adjusted pre-tax earnings (EBIT) fell by 28.7% and 29.1%.
The firm's commercial business was the only branch to report EBIT growth at 6.4% with a revenue decline of 2%, meanwhile, the Lay & Wheeler business reported a 9.4% and 22.9% fall in revenue and EBIT respectively.
Majestic said the UK market was dragging on its Retail and Commercial markets, adding that the overall drop in profits was due to its investment programme.
The firm invested around £7.9mln in its Naked Wines business, adding that it planned to invest an additional £9mln-£12mln in the 2019 financial year aimed at driving more growth.
In its outlook, the company said it aimed to double its investment over the next few years, adding that despite the business being “in much better shape” than three years ago, the market was “a lot tougher”.
The group also said it would be stockpiling around £5mln-£8mln in additional inventory to mitigate against any disruption caused to its supply chains by Brexit next year.
In the short-term, Majestic said while it expected the retail and commercial branches to be stronger in the second half, EBIT would be flat for the full year as opposed to previous expectations for growth.
Rowan Gormley, Majestic’s chief executive, said that the company’s business was now almost 45% online and 20% international with plans to “invest further in order to drive returns”.
Multiple downgrades as brokers don't expect retail forecast to improve
Despite the “steady as she goes” ethos of the results, analysts at City broker Peel Hunt were less impressed, downgrading to ‘Hold’ from ‘Buy’ and slashing their target price on the stock to 350p from 600p.
In a note to clients, the broker said while the Naked segment was “making the expected progress”, the company’s core retail arm looked “very fragile, with industry conditions extremely tough and no room for any price increases to be passed on to customers (which puts a lot of pressure on gross margins)”.
“Whilst we understand the longer-term opportunity at Naked, we suspect the forecast might well keep falling in retail, something that the overall multiple will not be tolerant of” they added.
The ‘Hold’ from ‘Buy’ downgrade was echoed by fellow broker Liberum, who added that the weak performance was “a surprise and should have been better considering the Summer”.
Analysts added that in the current market “there is much value placed on predictability, visibility and sustainability in earnings”, and the swings in guidance and profits for Majestic may leave investors frustrated.
Shares were down 16.7% at 312p.
--Adds details on Brexit inventory stockpile and updates share price--