City brokers Liberum and Peel Hunt have both downgraded Majestic Wine PLC (LON:WINE) to ‘Hold’ from ‘Buy’ amid a weak set of first half results.
In a note, Liberum’s analysts said the weak performance from the wine sellers retail division had been “a surprise” given the hot summer weather.
READ: Majestic Wine slumps as it swings to loss in first half as investment and sluggish UK market eat into earnings
They added that despite key performance indicators (KPIs) in the company’s Naked Wines online segment being revised down, investment levels were still poised to keep rising.
“The combination of these leads to further cuts in the numbers” analysts said, while also reducing their own pre-tax earnings (EBIT) forecast by 25%-30% across the board for the 2019 to 2021 financial years.
To reflect the forecast cuts, the broker also slashed its target price for the group to 360p from 535p previously.
Peel Hunt sees glum outlook for retail
In its own downgrade note, accompanied by a price cut to 350p from 500p, Peel Hunt joined the chorus highlighting the weakness of the retail division, saying the segment looked “very fragile currently, 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)”.
Analysts added that while Naked Wines presented a longer-term opportunity, forecasts for the retail division would continue to fall, “something that the overall multiple will not be tolerant of”.
“Only a handful of retailers have enjoyed the last six months and Majestic is not one of them. In LFL terms, 2% didn’t look like a bad effort at first glance. However, both gross margins and cost ratios were under pressure in H1 and that looks unlikely to change”.
Peel Hunt also cut its pre-tax profit forecasts for the 2019 financial year by £2mln and by £2.5mln for the year after, citing that the in-store situation was “more serious” than initially feared.
“Stores are closing (albeit slowly), online is picking up but at a cost, and forecast momentum is unlikely to flip”.
In its half year results on Thursday, the AIM 100 firm swung to 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.
In late-morning trading Thursday, Majestic’s shares were down 16.7% at 312p.