News of the shake-up didn't go down well with investors, with the stock down 11% to 240.8p in mid-morning trading on Monday.
Naked, which was bought for £70mln back in 2015, now accounts for a third of the group’s annual sales and bosses today unveiled drastic shake-up plans to help capitalise on the “significant growth opportunities” within the division.
“It is clear that Naked Wines has the potential for strong sustainable growth, and we will deliver the best results for our shareholders, customers, people and suppliers by focusing all our energies on delivering that potential,” said Majestic chief executive and Naked Wines founder Rowan Gormley.
“We also believe that a transformed Majestic business does have the potential to be a long-term winner, but that we risk not maximising the potential of Naked if we try to do both.”
Naked currently spends around £20mln every year on things such as marketing and promotions to help it win new customers, but Majestic bosses want to up this to £26mln+ from 2020 onwards.
To help fund the additional outlay, the AIM company has proposed closing stores and selling off assets, which it said would release capital without diluting shareholders.
Another way to free up some cash would be to cut its dividend, something which it said it is considering.
Reflecting the sharper focus on increased investment in Naked, bosses will ask investors later this year to approve a change of name to Naked Wines PLC.
The overhaul is likely to come at some cost, though.
Majestic expects to take a £10mln restructuring charge in this year’s accounts, while there is the potential for further “substantial cash restructuring charges” further down the line.
This year’s headline figures won't be affected though, with sales on track to hit £500mln in 2019 and underlying pre-tax profits, which excludes any charges, to be in line with the current consensus of £11.1mln.
'Unexpected' change of direction
“A drastic and unexpected change in strategy leads to cuts to forecasts from FY20 onwards,” said analysts at City broker Liberum.
“The sale of Majestic, or site closures is a complete change and this could have material impacts to the balance sheet, and dividends – quite a change in tone and strategy since the Capital Markets Day last year.”
Edison’s head of consumer research, Paul Hickman, said the transformation plan was “inevitable” given the growing popularity of the Naked brand.
--Updates for share price and analyst comment--