In the 10 weeks to 2 January, Majestic Retail had its biggest ever Christmas with LFL sales up 7.5%, which topped the 7.3% growth seen the year before, though around half a percentage point of growth this time round was due to one-off transfers of sales from closed stores.
The group was not immune to price competition, however, and said that its gross margin percentage was down by around a point from a year ago “in a heavily discounted UK market still coming to terms with recent currency movements”.
"Delivering strong like-for-likes in a tough market is a tribute to the hard work that our people put in - right across the business,” said Rowan Gormley, chief executive of Majestic.
“It is also particularly pleasing that both Naked Wines and Majestic Commercial traded in line with expectations and Lay & Wheeler has maintained its strong growth,” he added.
Naked Wines saw sales rise 29.9% year-on-year while Majestic Commercial saw its sales ease 0.8%, on a constant exchange rates (CER) basis.
Lay & Wheeler grew sales by 62.3% from a year earlier on a CER basis.
The group has had to change its business model to respond to increased competition from online sellers, and Gormley claimed management’s transformation plan is working, with the group on track to achieve its £500mln sales goal.
“We said that we would be better prepared for Christmas than ever - and the numbers show that we did what we said we would do,” Gormley said.
“At this stage we are not predicting a change to long term margin expectations, but we need to retain flexibility to compete in a competitive market,” he added.
Broker reaction was mostly positive.
“A very strong update from Majestic Wine has provided us with confidence to leave forecasts unchanged,” said Liberum Capital Markets.
“The shares have relatively underperformed the wider sector by 27.4% the last six months, reflecting the markets rather pessimistic view on FY outturn. Today’s update should now help quell these concerns,” the broker added, as it stuck by its ‘buy’ recommendation and 380p price target.
Shore Capital also had its mind eased by the performance, despite the red flag of the comments about margin.
“Overall, we believe this is a positive update from Majestic that highlights the work being done to become a more consumer focused business is working. Whilst the margin performance in Retail might be seen as overly negative, we highlight that Majestic has competed effectively and won the customer against a backdrop of heavy discounting,” Shore’s Phil Carroll said.
“Clearly, the competitive environment is likely to remain but hopefully this is captured in our assumptions. Furthermore, it is compensated by higher than expected sales growth not only in Retail but also Naked Wines and Lay & Wheeler,” he added.
The broker reiterated its ‘buy’ recommendation and 324p price target.
Investec said the company is peaking at the right time, as it added its voice to the chorus of ‘buy’ recommendations.
“A record performance through peak for Retail should in our view help reassure that the turnaround strategy remains on track. Although gross margins are softer than expected, this should help reinforce value credentials which should be beneficial over the medium term,” said Investec’s Alistair Davies.
“We make no change to our top end forecasts, but expect consensus to drift up on the back of this morning’s update. Valuation remains attractive in our view, with potential for a sustainable Retail recovery and long-term growth at Naked,” he added.
John Stevenson at Peel Hunt was a bit more circumspect, rating the shares no more than a ‘hold’, and describing today’s update as “largely a curate’s egg”.
“It’s encouraging that the retail stores lapped a tough comp with 7% LFL, a function of better availability and lower prices, and the pace of growth at Naked is solid too; however, the group gross margin was down about 1%, which suggests some pretty negative territory in the individual silos given what should be a positive sales mix effect,” Stevenson said.
Stevenson does not believe estimates will change on the back of this update – Liberum’s comment seems to back up this view – and he is yet to be persuaded that we are necessarily any nearer to forecast momentum improving here.
The analyst noted there’s plenty of work still to do in the final quarter of the financial year to meet consensus, so with the earnings multiple factoring in expected growth, “there’s not much to get excited about for now”, in Stevenson’s view.
The shares rose 3.4% to 335p initially on the update but by mid-morning the gain had been trimmed to 2.6%.