Majestic Wine tops up investment in Naked Wines, but warns profits will fall

 
Alys Key
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Majestic boss Rowan Gormley says investment can be doubled to grow the business (Source: Majestic Wine)

Majestic Wine has committed to investing more in its Naked Wines business, but profits are likely to be slashed in the process.

Ahead of a capital markets day this afternoon, the wine retailer said it would invest an additional £9m-£12m, but that this would reduce 2019's adjusted earnings before interest and tax by £2m to £3m.

Shares were up seven per cent before lunchtime as investors anticipated long-term gains from the business.

The group said that the opportunity to invest in new customer acquisition was bigger than previously thought, and that it could get greater returns from investing more.

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"We are starting from a good place with the core business on track to meet our 2019 sales target of £500m and the market’s expectation for profits and dividend in FY18," said chief executive Rowan Gormley.

"In the last three years, we have doubled sales at Naked Wines and delivered profitability in all three markets - after increasing investment in new customer acquisition.

"We believe we can double the level of investment again while maintaining the returns, driving sustained growth in shareholder value."

The board expects to see significant benefits from 2021 and beyond.

Speaking to City A.M., Gormley said that the company had put a lot of time into researching its next move.

"We've got a compelling body of evidence that says it's the right thing to do," he said. "It's not something we've decided overnight we're going to do."

Naked Wines is an online business which offers customers preferential wine prices in exchange for funding independent winemakers. It was founded by Majestic's chief executive Gormley in 2008 and bought out by the company in 2015, when he was appointed boss of the enlarged group.

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Early verdicts from the City were positive, with Liberum analysts commenting that on an intrinsic value basis, Naked Wines is now worth almost as much as Majestic retail's enterprise value.

"Alongside this, Majestic Retail has very high customer loyalty and has proven it is able to deliver growth having adopted a customer centric strategy," they said.

Analysts at Peel Hunt called the decision "intriguing and very encouraging", adding: "Our view is that if Majestic is ever to fulfil its potential with Naked, it can’t die wondering. So we endorse the decision to press on."

Shares opened down four per cent as investors noted the hit to the bottom line, but quickly recovered and were up seven per cent before lunchtime.

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