Majestic Wine (LSE: MJW) has become the latest high-profile public company to suspend its dividend payout to shareholders amid difficult trading conditions.
Shares in Majestic Wine slipped as much as 7% in early trading after the company reported a 50% fall in first-half pre-tax profit and suspended dividend payouts due to a new business investments.
The company announced that pre-tax profit for the six months ended September 28 fell to £4.3m, down from £8.5m as reported in the year-ago period. However, revenue was up 36% year-on-year to £181.6m. Management attributed the fall in first-half profits to charges relating to the Naked Wines acquisition, interest costs and exceptional items.
Additional one-off costs are expected during the second half of the year. Majestic is guiding for £0.5m of exceptional costs and £5m of non-cash acquisition-related accounting charges.
Moreover, underlying group costs are growing faster than inflation due to the legacy of store opening programme. Total costs are expected to expand £4.5m for 2016.
Nonetheless, despite all the negative factors listed above, Majestic’s adjusted earnings before interest and tax increased 12% to £9.5m during the first half.
Investing for growth
Majestic’s management also announced a new, three-year transformation plan alongside its half-year results.
The plan, designed to deliver sustainable, volume led earnings growth and improved return on capital will see the group review its UK store network and expanding its UK B2B business.
Management is now targeting over £500m group sales by 2019 and it plans to hit this target by using a disciplined investment strategy. Higher returns will be sought from the current level of investment spend and the focus will be shifted from opening new stores to new customer recruitment.
The company estimates that these new business development initiatives will cost £4m for full-year 2016 and £8m in the years following.
Uphill struggle
Majestic’s three-year plan to drive growth sounds impressive and ambitious, but only time will tell if it’s the right path to take.
The company has been struggling with falling sales and shrinking margins for years now as low-cost competitors eat away at Majestic’s market share. Indeed, between 2011 and 2015 Majestic’s pre-tax profit contracted by around 5%. If we factor in today’s profit warning, it’s likely that between 2011 and the end of the company’s 2016 financial year, pre-tax profit will have fallen somewhere in the region of 10% to 15%.
Over the same period, the company’s sales have increased by 20% so it’s clear that Majestic’s margins and returns are coming under pressure.
With this being the case, it’s difficult to justify buying Majestic at the company’s present valuation. You see, even after today’s declines, Majestic is still trading at a forward P/E of 16.2, which is relatively expensive for a company with shrinking margins, falling profits and no business moat.
What’s more, with earnings set to fall further this year and no dividend on the cards, it really does look to me as if Majestic’s shares are overvalued at present levels.
