Majestic Wine’s share price has plunged more than 25% after the company issued a profit warning because of a failed marketing campaign in the US and weak sales to business customers.
Britain’s biggest specialist wine retailer said it had overspent on testing a direct mailing campaign at Naked Wines in the US. The company has stopped the initiative, but said in the short term it would mean higher costs in the first half of the year.
Majestic said it would miss profit expectations for the year ending next April. The gloomy trading update sent the company’s share price down by 25% in early trading on Wednesday, to 325p.
The chief executive, Rowan Gormley, said: “No one likes to see the share price go down, but the long-term outlook is what matters.”
He said that while Majestic was operating in a tough market, there was no discernible impact as yet from the Brexit vote in June and consumer spending remained unchanged.
He warned, however, that the weaker pound – which makes imports more expensive – could mean higher prices have to be passed on to customers in the future. “If the pound remains down over the long term, at some point wine prices will have to go up to reflect that, and that will be the same for all retailers. Prices will have to adjust,” Gormley said.
In April 2015, Majestic bought Naked Wines, an online retailer that lets subscribers fund independent winemakers in exchange for purchases of exclusive bottles at preferential prices. Gormley was its founder, and became Majestic’s CEO when the deal occurred.
After making an unexpected profit for Majestic last year, Naked Wines is expected to make a small loss in the current financial year.
Majestic said the second factor weighing on full-year profits was weak growth in its commercial division, which sells wine to businesses. It said conditions had become more challenging, with sales flat in the first half of the year. The company needed to find a better, more profitable way forward for the commercial business, it said.
The combination of weak sales and the failed direct mailing test meant profits in the year to 3 April 2017 would be lower than current market expectations of £16.1m, Majestic said.
Gormley added: “It is very disappointing that two isolated factors are distracting from the great progress across the rest of the group. We have always said that we would adopt a test and learn approach, and be quick to redeploy capital from underperforming areas, which is exactly what we are doing.
“While this approach is delivering good results in the other business units, the scale of the US market means that even a test can have a material effect on profits.”
Gormley said the turnaround plan for its retail business – which includes 210 stores in the UK – was progressing well, and preparations for the peak Christmas trading period were “well in hand”.
He pledged to revive Majestic after several years of disappointing results and abandoned a minimum six-bottle purchase rule left over from its days as a warehouse, simplified prices and updated the range of drinks.
Naked Wines in the UK and Australia, and the underlying business in the US, were trading well, he said.
Despite the profit warning, Majestic said it was on track to resume dividend payments this year and to achieve its goal of £500m sales by 2019. In the year to 28 March 2016, sales were £402m.
Connor Campbell, an analyst at Spreadex, said: “It looked like someone at Majestic Wine had smashed a crate of claret over its chart on Wednesday, with the stock plunging 25%.
“At the time, the Majestic Wine/Naked Wines merger was celebrated as a savvy consolidation of the two companies; now, however, it looks like Rowan Gormley may be pushing the firm to expand too quickly, resulting in the direct mail mess in the US.”
