Majestic Wine LON:WINE
March 05, 2017 - 7:30pm EST by
scrooge833
2017 2018
Price: 328.75 EPS 0 0
Shares Out. (in M): 71 P/E 0 0
Market Cap (in $M): 229 P/FCF 0 0
Net Debt (in $M): 20 EBIT 19 0
TEV ($): 249 TEV/EBIT 13 0

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Description

 

Majestic Wine can be a double in 2 years, and a massive home run if it achieves its optimistic scenario. Majestic Wine Group owns four divisions:

• Majestic Wine - The UK's largest specialist wine retailer, with 210 branches in the UK, 2 in France with over 900 trained specialist people. Sales for fiscal year March 2016: 244M Pounds. (Market size:2.2B, FY'2016 Sales Growth +5.5%)
• Naked Wines - Naked Wines funds independent winemakers to make exclusive wines at preferential prices, which we pass onto our customers. Sales for fiscal year March 2016: 104.3M Pounds. (Market size:17B,  FY'2016 Sales Growth +27.3%
• Wine Specialists Commercial - A specialist on-trade supplier targeting independent restaurants and pubs, with the unique advantage of running their supply chain through Majestic Retail stores. Sales for fiscal year March 2016: 45.6M Pounds. (Market size: 2B,  FY'2016 Sales Growth +7.9%)
• Lay&Wheeler - A specialist fine wine merchant, Lay & Wheeler aims to be a trusted guide for people who love fine wine, supplying the world's finest wines with a personal service. Sales for fiscal year March 2016: 10M Pounds. (Market size: 700M,  FY'2016 Sales Growth +10.0%)

 

10 YEAR RECORD

2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 TTM
Revenue GBP Mil 191 197 202 233 257 280 274 278 284 402 426
Gross Margin % 21.1 21.3 20.6 21.3 21.5 22 22.8 23 23.3 25.9 25.7
Operating Income GBP Mil 16 17 8 16 21 23 24 24 19 6 -3
Operating Margin % 8.2 8.4 3.7 7.1 8 8.4 8.7 8.6 6.5 1.6 -0.6
Net Income GBP Mil 11 11 3 11 14 17 17 18 13 2 -3
Earnings Per Share GBP 0.17 0.17 0.05 0.18 0.23 0.26 0.27 0.27 0.2 0.03 -0.05
Dividends GBP 0.07 0.09 0.1 0.1 0.11 0.15 0.17 0.18 0.16    
Payout Ratio % * 44.8 50.8 184.9 53.5 49.4 59.6 64.9 62.9 65.1 31.6  
Shares Mil 66 63 61 62 63 64 65 66 66 70 70
Book Value Per Share * GBP 0.78 0.8 0.77 0.87 1.04 1.06 1.2 1.34 1.44 1.47 1.55
Operating Cash Flow GBP Mil 13 18 11 17 17 19 21 18 27 14 15
Cap Spending GBP Mil -8 -11 -7 -6 -8 -11 -12 -10 -8 -6 -5
Free Cash Flow GBP Mil 5 7 4 10 9 8 9 8 19 8 10
Free Cash Flow Per Share * GBP 0.11 0.11 0.06 0.17 0.14 0.08 0.08 0.12 0.13 0.25  
Working Capital GBP Mil 7 -2 -3 0 7 7 11 16 18 9  
                       
Key Ratios -> Profitability                      
Margins % of Sales 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 TTM
Revenue 100 100 100 100 100 100 100 100 100 100 100
COGS 78.91 78.68 79.36 78.69 78.55 78 77.24 76.98 76.7 74.07 74.34
Gross Margin 21.09 21.32 20.64 21.31 21.45 22 22.76 23.02 23.3 25.93 25.66
SG&A 8.07 8.35 9.12 8.65 8.11 13.93 14.37 14.7 17.08 24.56 26.46
R&D                      
Other 5.37 5.09 8.32 6.16 5.91            
Operating Margin 8.2 8.38 3.74 7.06 8.03 8.36 8.68 8.59 6.52 1.56 -0.63
Net Int Inc & Other 0.25 0.1 -0.08 -0.2 -0.15 -0.08 -0.05 -0.05 -0.04 -0.38 -0.29
EBT Margin 8.45 8.48 3.66 6.87 7.88 8.28 8.63 8.54 6.48 1.18 -0.92
                       
Profitability 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 TTM
Tax Rate % 32.51 32.62 55.79 29.55 29.8 27.94 26.82 25.92 26.83 51  
Net Margin % 5.7 5.71 1.62 4.84 5.53 5.96 6.31 6.33 4.74 0.58 -0.81
Asset Turnover (Average) 2.22 2.13 1.93 2.03 2.01 1.99 1.88 1.83 1.8 2.04 1.7
Return on Assets % 12.64 12.17 3.12 9.83 11.14 11.87 11.84 11.56 8.53 1.18 -1.38
Financial Leverage (Average) 1.71 1.96 2.36 2.19 2.13 1.88 1.7 1.62 1.63 2.14 2.37
Return on Equity % 21.82 22.34 6.72 22.28 24.02 23.66 21.1 19.15 13.85 2.24 -3.23
Return on Invested Capital % 21.18 20.94 5.78 19.2 21.82 23.44 20.72 18.66 13.68 2.58 -1.68
Interest Coverage   274.8 34.85 35.66 49.38 95.69 165.44 152.34 126.32 4.36 -2.52
                       
Key Ratios -> Growth                      
  2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 Latest Qtr
Revenue %                      
Year over Year 11.03 3.05 2.42 15.57 10.33 8.94 -2.1 1.36 2.28 41.33  
3-Year Average 8.85 6.63 5.43 6.85 9.3 11.58 5.57 2.63 0.5 13.58  
5-Year Average 12.82 9.41 6.36 7.49 8.36 7.95 6.85 6.63 4.05 9.34  
10-Year Average 14.39 12.54 11.43 11.13 11.48 10.36 8.12 6.49 5.76 8.85  
Operating Income %                      
Year over Year 11.42 5.22 -54.3 118.32 25.51 13.33 1.67 0.32 -22.38 -66.11  
3-Year Average 14.64 9.25 -18.78 1.63 7.78 45.89 13.08 4.95 -7.49 -35.86  
5-Year Average 21.33 14.88 -6.24 5.4 7.98 8.35 7.61 25.93 2.4 -21.19  
10-Year Average 28.23 18.52 6.98 14.09 16.62 14.66 11.19 8.66 3.89 -7.75  
Net Income %                      
Year over Year 13.24 3.2 -71.01 245.8 26.15 17.48 3.65 1.58 -23.42 -82.76  
3-Year Average 14.85 9.62 -30.29 1.13 8.13 72.41 15.39 7.35 -6.93 -48.81  
5-Year Average 22.84 15.87 -14.64 5.72 8.12 8.92 9.02 40.09 3.63 -30.4  
10-Year Average 29.41 17.82 0.99 13.77 16.61 15.67 12.39 9.35 4.67 -13.25  
EPS %                      
Year over Year 12.93 6.63 -70.06 245.28 23.5 15.49 1.92   -23.31 -83.82  
3-Year Average 13.68 10.27 -28.83 3.3 8.49 70.13 13.28 5.58 -7.89 -50.13  
5-Year Average 20.91 15.26 -14.05 6.75 8.98 9.47 8.49 38.08 2.2 -31.94  
10-Year Average 26.16 16.87 0.39 13.35 15.88 15.05 11.82 8.94 4.45 -13.88  
                       
Key Ratios -> Cash Flow                      
Cash Flow Ratios 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 TTM
Operating Cash Flow Growth % YOY 44.01 36.73 -39.02 52.39 1.93 9.7 15.8 -15.39 51.45 -48.53  
Free Cash Flow Growth % YOY 5770.24 46.18 -48.38 179.39 -16.01 -13.38 18.44 -11.97 141.71 -57.06  
Cap Ex as a % of Sales 4.24 5.39 3.54 2.65 3.17 3.91 4.55 3.69 2.96 1.48 1.17
Free Cash Flow/Sales % 2.58 3.66 1.84 4.46 3.39 2.7 3.26 2.84 6.7 2.04 2.34
Free Cash Flow/Net Income 0.45 0.64 1.14 0.92 0.61 0.45 0.52 0.45 1.41 3.52 -2.88
                       
Key Ratios -> Financial Health                      
Balance Sheet Items (in %) 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 Latest Qtr
Cash & Short-Term Investments 5.18 3.02 3.04 4.27 4.58 2.07 3.34 3.6 6.85 3.32 5.72
Accounts Receivable 3.66 3.45 3.8 3.35 3.29 3.11 4.1 3.14 3.4 3.55  
Inventory 34.52 35.66 33.65 32.85 33.69 35.87 34.38 35.27 33.75 34.53 38.09
Other Current Assets 4.67 3.73 6.48 4.3 4.48 4.56 3.55 3.19 3.15 2.46 7.02
Total Current Assets 48.03 45.87 46.96 44.77 46.04 45.61 45.37 45.2 47.15 43.87 50.83
Net PP&E 43.21 45.64 44.17 44.43 39.27 42.36 45.33 46.17 45.2 29.95 26.5
Intangibles 7.31 8.03 8.45 7.75 6.3 5.83 6.1 5.87 5.6 24.24 20.77
Other Long-Term Assets 1.45 0.47 0.42 3.04 8.39 6.2 3.2 2.76 2.05 1.94 1.89
Total Assets 100 100 100 100 100 100 100 100 100 100 100
Accounts Payable 28.88 35.1 36.43 28.18 26.2 26.11 26.79 23.82 25.21 17.12 30.49
Short-Term Debt   2.82 4.12 2.67 0.63 1.27 1.38 2.45   3.45 2.14
Taxes Payable 1.5 2.26 1.35 2.1 2.42 2.1 4.23 3.89 4.41 4.19  
Accrued Liabilities                      
Other Short-Term Liabilities 9.88 7.66 8.09 12.04 11.71 11.52 5.81 4.71 6.61 15.23 10.49
Total Current Liabilities 40.27 47.84 49.99 44.98 40.95 41 38.2 34.88 36.22 39.98 43.12
Long-Term Debt     5.57 4.76 3.55         10.4 11.89
Other Long-Term Liabilities 1.33 1.23 2.01 4.5 8.57 5.7 2.95 3.26 2.44 2.91 2.78
Total Liabilities 41.6 49.07 57.56 54.24 53.07 46.7 41.15 38.14 38.66 53.29 57.79
Total Stockholders' Equity 58.4 50.93 42.44 45.76 46.93 53.3 58.85 61.86 61.34 46.71 42.21
Total Liabilities & Equity 100 100 100 100 100 100 100 100 100 100 100
                       
Liquidity/Financial Health 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 Latest Qtr
Current Ratio 1.19 0.96 0.94 1 1.12 1.11 1.19 1.3 1.3 1.1 1.18
Quick Ratio 0.22 0.14 0.14 0.17 0.2 0.13 0.2 0.21 0.29 0.19 0.27
Financial Leverage 1.71 1.96 2.36 2.19 2.13 1.88 1.7 1.62 1.63 2.14 2.37
Debt/Equity     0.13 0.1 0.08         0.22 0.28
                       
Key Ratios -> Efficiency Ratios                      
Efficiency 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 TTM
Days Sales Outstanding 6.53 6.08 6.89 6.42 6.01 5.87 7.04 7.22 6.63 6.25 11.57
Days Inventory 71.41 76.44 82.45 75.84 76.82 81.82 88.47 90.4 90.44 82.7 98.84
Payables Period 63.29 69.98 85.4 73.49 62.52 61.49 66.66 65.59 64.29 49.34 90.52
Cash Conversion Cycle 14.65 12.55 3.94 8.76 20.31 26.2 28.85 32.03 32.78 39.61 19.89
Receivables Turnover 55.88 60.01 52.99 56.9 60.69 62.2 51.87 50.58 55.04 58.41 31.54
Inventory Turnover 5.11 4.77 4.43 4.81 4.75 4.46 4.13 4.04 4.04 4.41 3.69
Fixed Assets Turnover 5.24 4.79 4.3 4.59 4.84 4.87 4.27 3.99 3.94 5.64 6.06
Asset Turnover 2.22 2.13 1.93 2.03 2.01 1.99 1.88 1.83 1.8 2.04 1.7


At first glance, while gross margins and revenues are going in the right direction, the record does not look fascinating.  But I noticed that a couple of insiders bought shares in this company in November 2016.  And the story gets better.

The biggest recent development happened on April 10, 2015 when Majestic Wine bought the Naked Wines for 50 million pounds plus contingent consideration of 20 million pounds in shares, with revenues of 80 million pounds, growing 40% and EBITDA breakeven. The purchase expanded their market size by five fold and transformed Majestic Wine into chance to become a unique, customer led business model with world class online and CRM expertise. Over 70% of Naked Wines management’s potential consideration in Majestic’s ordinary shares (wholly contingent on performance). We will explain later why we think the initial signs after the acquisition look headed in the right direction.  The acquisition brought Naked Wines' impressive founder and CEO,Rowan Gromley, to run the entire group of Majestic Wine. Here is an excerpt from a news article that covered the purchase: "10 April 2015 Majestic Wine is taking over smaller online rival Naked Wines. The move will also see Naked Wines founder, Rowan Gormley, taking over as chief executive of the overall company. Majestic's previous chief executive, Steve Lewis, left the post in February. Majestic said the £70m deal would combine Naked Wines' online and e-commerce skills and Majestic's national store network. It also said trading in March was weak. Its shares fell 6% in early business.Rowan Gormley has founded a number of high-profile businesses. As well as Naked Wines, which started business in 2008, he was also behind the launch of Virgin Wines, the Virgin ONE Account and Virgin Money."

A presentation about the acquisition can be found here: http://majesticwineplc.co.uk/wp-content/uploads/Acquisition-of-Naked-Wines-10-April-vFINAL.pdf
and a Site Visit of Naked Wines can be found here: http://majesticwineplc.co.uk/wp-content/uploads/Naked-Wines-Norwich-investor-presentation-Final-1.pdf

One cannot be bullish on this stock unless one is bullish on Rowan Gromley and his team. Rowan Gromley's story is fascinating itself.  Gormley immigrated to the UK from South Africa. He studied at Selborne College East London and the University of Cape Town. He trained as an accountant with Arthur Andersen in South Africa for three years before moving to the UK in 1987 to work in venture capital for Electra Capital Partners. Gormley was in private equity for seven years before going to work for Richard Branson in 1994. In http://www.businessinsider.com/what-richard-branson-taught-this-wine-ceo-2016-7, Branson hired him on a "gut feeling" and with no specific work for him.  Branson brought him to Virgin to identify new business opportunities. When he spotted financial services as a potential area for Virgin to explore, Branson asked Gormley to run it, and Virgin Direct (now Virgin Money) was born in 1995 with Gormley as CEO. Whilst at Virgin Direct, Gormley was also behind the launch of The One Account, now a part of Royal Bank of Scotland. After leaving Virgin Money, he launched three new start-ups. His first was Orgasmic Wines with the help of his business partner Laura Knight and his brother Clinton Gormley. The firm became Virgin Wines in 2000 when Richard Branson bought into the business. Laithwaites subsequently bought Virgin Wines and Gormley left the Company in June 2008. Gormley set up Naked Wines in December 2008 with eight of the old Virgin Wines team. Naked Wines was launched in the USA and Australia in 2012.

In terms of incentives, he is incentivized to make this work through the 20 million pound contingency stock consideration. In addition, he seems to motivated by passion than just pure money.  He gave up his bonus, declined shares and gave his staff 7 million pounds.  Source: http://www.thisismoney.co.uk/money/markets/article-3707568/The-Wine-Chief-gave-bonus-hand-staff-7m-Rowan-Gormley-declined-shares-offered-him.html

Here is an interview: http://www.telegraph.co.uk/foodanddrink/wine/11798513/Can-Rowan-Gormley-work-his-magic-on-Majestic-Wine.html

Gormley announced his transformation plan for Majestic Wine in November 2015 and set the Group a new goal to achieve £500m annual sales by 2019.  Rowan brought his team over and set a simple goal of achieving $500M in sales by 2019 by studying obsessively on customer feedback and CRM data.  Majestic Wine is now on the 1st quarter of its second year of a 3 year plan to bring group sales above $500 million by Fiscal Year 2019.

The new team seems to be practicing what they preached. http://www.businessinsider.in/Britains-biggest-wine-retailer-just-totally-changed-its-business/articleshow/49536699.cms

Results, so far, are encouraging:

The group's revenues are up 41.3% (11% pro-forma).  Naked Wine's revenues are up 27%.   And if you try to dig why this is so, it gets better. It is doing it the old-fashioned way of going back to the basics: through constant learning and asking of the customers.

Pages 8-10 of the Annual Report http://majesticwineplc.co.uk/wp-content/uploads/annual-report-2016.pdf

From the CEO letter:

"It is very fashionable to claim to be profitable and nice. We don’t go along with that. We believe you have to be nice to be profitable. Just in case I have not made the point... we don’t just focus on customer retention, we obsess about it. Let me show you an example: The clever young man who runs Naked Wines UK, Eamon Fitzgerald, spotted something interesting. We ask all customers who interact with us to rate the experience on a scale of 1-5. Eamon noticed that customers who had a 5* experience were 62% more valuable than customers who had a 4* experience. 62%! He knows a seam of gold when he sees one, so he rebuilt our customer service function to deliver 5* experience. 1. We changed the name. From customer service to The Customer Happiness Team. 2. By reading the data behind our tests we can change how we motivate our teams. We stopped measuring the number of calls per hour and now only measure 5* ratings. 3. We put a new pay scheme in place where someone who does their job well can grow their income by 20% a year. The result… 5* ratings have increased from 86% to 90% this year and customer retention has increased from 78% to 80% in the same period."

"Many companies regard investment as a necessary evil. We regard it as an opportunity to beat the market. Where we can spend more money and get a return we will. When we talk about investment, we don’t just mean bricks and mortar – we mean any opportunity to deploy cash to generate value. This means we are agnostic about whether we invest in Capex or Opex, in the UK or the US, in Naked Wines or the original Majestic businesses. An investment we made this year which delivered attractive ROI is wine quality. We measure our wine quality through “Buy It Again” (BIA) scores that our Angels give our wines. We saw that Angels with stronger BIA ratings across their fi rst orders deliver much greater loyalty and lifetime value. So we tested investing more into our wines; this reduced gross profi t at first but increased the BIA ratings by 10 basis points, increasing the lifetime value of our Angels."

"We don’t debate, we test. Because that way we know what works, and we know it a lot sooner than if we spent ages debating it. Test and learn companies are also able to spot the stars of tomorrow; they are the ones looking to find a better way today. An example is the current recalibration of Naked Wines, away from a loss leading recruitment strategy to one where we focus on higher quality customers with higher retention through better quality wines. As a result we are recruiting less, but higher quality Angels and are focusing more on lifetime values. In the USA, for example, our customer attrition rate in the past year has fallen materially from these new measures. The end result of this is that we are delivering the same or better ROI, can open new channels of marketing, i.e. invest more, and will have a bigger business in three years than we would have had."

"In short...Some early signs of success: I am delighted with our new team. But this is a three-year plan, all of our big projects are at a very early stage and still have a long way to go before we see their effects. Early signs... I am pleased to say reported Group revenue is up 41.3% (11.0% pro-forma). Due to the increased investment of £4.1m as part of our Majestic transformation programme Group adjusted profit before tax is 11.9% lower on last year on a pro forma basis, (-30.3% lower on a reported basis). Reported profit before tax of £4.7m was achieved after recognition of significant non-cash and one-off items. So the early signs are encouraging, but at the risk of repeating myself, this is the start of a three year plan – it is too early to say that it is working yet."

"How are we doing in executing our plan? In our view, these five Group Key Performance Indicators are the best way of measuring how we are doing in delivering our “deliver value by doing the right thing” plan. We are in the process of embedding these across the Group, so there remain a number of “N/A”s in the table below which we will get populated in the coming months. However, as you can see, we have good progress in three of these in the Retail division. The one number that is going the wrong way is team retention. As we’ve said before we expect this to get worse before it gets better, as the changes we are making to the business bed in and staff decide whether the new Majestic is right for them or not."

For the Christmas season of 2016, Majestic Wine (the retailer division) posted 7.5% like-for-like sales growth year-on-year in the ten weeks to January 2, 0.5% of which was a one-off due to transferred sales from closed stores. The group’s overall sales increased 15.3% during the period as retail sales were up 6.2%, driven by a 29.9% leap in sales across its Naked Wine business, which the retailer acquired in 2015.  Here is a presentation of analyst visit to Majestic Wine retail stores: http://majesticwineplc.co.uk/wp-content/uploads/WINE-Investor-Visit-FINAL-3.10.16-Website.pdf

As a sign of confidence, the company reinstated its dividend ((For 2016, the company stopped its dividend after the acquisition of Naked Wines.  Company plans to reinstate the dividend in H1 2017 and have put in place a new policy of a base of circa 35% of adjusted earnings being returned to shareholders each year subject to no major changes in outlook. In addition, we intend to pay special dividends if management determines that excess cash is available that cannot be better used strengthening the balance sheet or reinvesting into the Group. The Board remains committed to maintaining a disciplined allocation of cash between deleveraging, growth and shareholder returns.)despite reporting a half-year loss on acquisition-related costs which offset a 13% rise in revenue.
From the recent news: "The U.K. wine retailer swung to a pretax loss of 4.4 million pounds ($5.4 million) in the six months ended Sept. 26 from profit of GBP4.3 million in the corresponding period a year earlier. Majestic Wine put the loss down to charges related to its acquisition of Naked Wines. Revenue rose to GBP205.6 million from GBP181.6 million. The company said it reintroduced an interim dividend of 1.5 pence a share to reflect confidence in the future growth prospects. "

LONG-TERM MODEL AND VALUATION

At a current valuation of 2 times book, and ten times EV to operating earnings (reached in each of the years 2013 and 2014), there seems to be enough margin of safety.  The company's TTM revenue is $426 million, with growth achieved in all divisions(+6%, +8%, +10%, +27%).  If company achieves its goal of $500 million revenues by 2019, a 10% net margin would be about 50 million pounds in net margin.  A 12 times P/E would equate to a $600 million pound market cap, double what it is now. And if this company's online customer data-driven model becomes successful, then the incremental sale does not depend on incremental COGS (e.g. Netflix-like business model), this stock can be a home run.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Positive early results from a transformational acquisition of 2 years ago

Recent Insider Buying in November 2016

Attractive valuation

Company going back to the basics: listening to its customers. 

Simplified strategy and clear goal. 

 

 

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    Description

     

    Majestic Wine can be a double in 2 years, and a massive home run if it achieves its optimistic scenario. Majestic Wine Group owns four divisions:

    • Majestic Wine - The UK's largest specialist wine retailer, with 210 branches in the UK, 2 in France with over 900 trained specialist people. Sales for fiscal year March 2016: 244M Pounds. (Market size:2.2B, FY'2016 Sales Growth +5.5%)
    • Naked Wines - Naked Wines funds independent winemakers to make exclusive wines at preferential prices, which we pass onto our customers. Sales for fiscal year March 2016: 104.3M Pounds. (Market size:17B,  FY'2016 Sales Growth +27.3%
    • Wine Specialists Commercial - A specialist on-trade supplier targeting independent restaurants and pubs, with the unique advantage of running their supply chain through Majestic Retail stores. Sales for fiscal year March 2016: 45.6M Pounds. (Market size: 2B,  FY'2016 Sales Growth +7.9%)
    • Lay&Wheeler - A specialist fine wine merchant, Lay & Wheeler aims to be a trusted guide for people who love fine wine, supplying the world's finest wines with a personal service. Sales for fiscal year March 2016: 10M Pounds. (Market size: 700M,  FY'2016 Sales Growth +10.0%)

     

    10 YEAR RECORD

    2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 TTM
    Revenue GBP Mil 191 197 202 233 257 280 274 278 284 402 426
    Gross Margin % 21.1 21.3 20.6 21.3 21.5 22 22.8 23 23.3 25.9 25.7
    Operating Income GBP Mil 16 17 8 16 21 23 24 24 19 6 -3
    Operating Margin % 8.2 8.4 3.7 7.1 8 8.4 8.7 8.6 6.5 1.6 -0.6
    Net Income GBP Mil 11 11 3 11 14 17 17 18 13 2 -3
    Earnings Per Share GBP 0.17 0.17 0.05 0.18 0.23 0.26 0.27 0.27 0.2 0.03 -0.05
    Dividends GBP 0.07 0.09 0.1 0.1 0.11 0.15 0.17 0.18 0.16    
    Payout Ratio % * 44.8 50.8 184.9 53.5 49.4 59.6 64.9 62.9 65.1 31.6  
    Shares Mil 66 63 61 62 63 64 65 66 66 70 70
    Book Value Per Share * GBP 0.78 0.8 0.77 0.87 1.04 1.06 1.2 1.34 1.44 1.47 1.55
    Operating Cash Flow GBP Mil 13 18 11 17 17 19 21 18 27 14 15
    Cap Spending GBP Mil -8 -11 -7 -6 -8 -11 -12 -10 -8 -6 -5
    Free Cash Flow GBP Mil 5 7 4 10 9 8 9 8 19 8 10
    Free Cash Flow Per Share * GBP 0.11 0.11 0.06 0.17 0.14 0.08 0.08 0.12 0.13 0.25  
    Working Capital GBP Mil 7 -2 -3 0 7 7 11 16 18 9  
                           
    Key Ratios -> Profitability                      
    Margins % of Sales 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 TTM
    Revenue 100 100 100 100 100 100 100 100 100 100 100
    COGS 78.91 78.68 79.36 78.69 78.55 78 77.24 76.98 76.7 74.07 74.34
    Gross Margin 21.09 21.32 20.64 21.31 21.45 22 22.76 23.02 23.3 25.93 25.66
    SG&A 8.07 8.35 9.12 8.65 8.11 13.93 14.37 14.7 17.08 24.56 26.46
    R&D                      
    Other 5.37 5.09 8.32 6.16 5.91            
    Operating Margin 8.2 8.38 3.74 7.06 8.03 8.36 8.68 8.59 6.52 1.56 -0.63
    Net Int Inc & Other 0.25 0.1 -0.08 -0.2 -0.15 -0.08 -0.05 -0.05 -0.04 -0.38 -0.29
    EBT Margin 8.45 8.48 3.66 6.87 7.88 8.28 8.63 8.54 6.48 1.18 -0.92
                           
    Profitability 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 TTM
    Tax Rate % 32.51 32.62 55.79 29.55 29.8 27.94 26.82 25.92 26.83 51  
    Net Margin % 5.7 5.71 1.62 4.84 5.53 5.96 6.31 6.33 4.74 0.58 -0.81
    Asset Turnover (Average) 2.22 2.13 1.93 2.03 2.01 1.99 1.88 1.83 1.8 2.04 1.7
    Return on Assets % 12.64 12.17 3.12 9.83 11.14 11.87 11.84 11.56 8.53 1.18 -1.38
    Financial Leverage (Average) 1.71 1.96 2.36 2.19 2.13 1.88 1.7 1.62 1.63 2.14 2.37
    Return on Equity % 21.82 22.34 6.72 22.28 24.02 23.66 21.1 19.15 13.85 2.24 -3.23
    Return on Invested Capital % 21.18 20.94 5.78 19.2 21.82 23.44 20.72 18.66 13.68 2.58 -1.68
    Interest Coverage   274.8 34.85 35.66 49.38 95.69 165.44 152.34 126.32 4.36 -2.52
                           
    Key Ratios -> Growth                      
      2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 Latest Qtr
    Revenue %                      
    Year over Year 11.03 3.05 2.42 15.57 10.33 8.94 -2.1 1.36 2.28 41.33  
    3-Year Average 8.85 6.63 5.43 6.85 9.3 11.58 5.57 2.63 0.5 13.58  
    5-Year Average 12.82 9.41 6.36 7.49 8.36 7.95 6.85 6.63 4.05 9.34  
    10-Year Average 14.39 12.54 11.43 11.13 11.48 10.36 8.12 6.49 5.76 8.85  
    Operating Income %                      
    Year over Year 11.42 5.22 -54.3 118.32 25.51 13.33 1.67 0.32 -22.38 -66.11  
    3-Year Average 14.64 9.25 -18.78 1.63 7.78 45.89 13.08 4.95 -7.49 -35.86  
    5-Year Average 21.33 14.88 -6.24 5.4 7.98 8.35 7.61 25.93 2.4 -21.19  
    10-Year Average 28.23 18.52 6.98 14.09 16.62 14.66 11.19 8.66 3.89 -7.75  
    Net Income %                      
    Year over Year 13.24 3.2 -71.01 245.8 26.15 17.48 3.65 1.58 -23.42 -82.76  
    3-Year Average 14.85 9.62 -30.29 1.13 8.13 72.41 15.39 7.35 -6.93 -48.81  
    5-Year Average 22.84 15.87 -14.64 5.72 8.12 8.92 9.02 40.09 3.63 -30.4  
    10-Year Average 29.41 17.82 0.99 13.77 16.61 15.67 12.39 9.35 4.67 -13.25  
    EPS %                      
    Year over Year 12.93 6.63 -70.06 245.28 23.5 15.49 1.92   -23.31 -83.82  
    3-Year Average 13.68 10.27 -28.83 3.3 8.49 70.13 13.28 5.58 -7.89 -50.13  
    5-Year Average 20.91 15.26 -14.05 6.75 8.98 9.47 8.49 38.08 2.2 -31.94  
    10-Year Average 26.16 16.87 0.39 13.35 15.88 15.05 11.82 8.94 4.45 -13.88  
                           
    Key Ratios -> Cash Flow                      
    Cash Flow Ratios 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 TTM
    Operating Cash Flow Growth % YOY 44.01 36.73 -39.02 52.39 1.93 9.7 15.8 -15.39 51.45 -48.53  
    Free Cash Flow Growth % YOY 5770.24 46.18 -48.38 179.39 -16.01 -13.38 18.44 -11.97 141.71 -57.06  
    Cap Ex as a % of Sales 4.24 5.39 3.54 2.65 3.17 3.91 4.55 3.69 2.96 1.48 1.17
    Free Cash Flow/Sales % 2.58 3.66 1.84 4.46 3.39 2.7 3.26 2.84 6.7 2.04 2.34
    Free Cash Flow/Net Income 0.45 0.64 1.14 0.92 0.61 0.45 0.52 0.45 1.41 3.52 -2.88
                           
    Key Ratios -> Financial Health                      
    Balance Sheet Items (in %) 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 Latest Qtr
    Cash & Short-Term Investments 5.18 3.02 3.04 4.27 4.58 2.07 3.34 3.6 6.85 3.32 5.72
    Accounts Receivable 3.66 3.45 3.8 3.35 3.29 3.11 4.1 3.14 3.4 3.55  
    Inventory 34.52 35.66 33.65 32.85 33.69 35.87 34.38 35.27 33.75 34.53 38.09
    Other Current Assets 4.67 3.73 6.48 4.3 4.48 4.56 3.55 3.19 3.15 2.46 7.02
    Total Current Assets 48.03 45.87 46.96 44.77 46.04 45.61 45.37 45.2 47.15 43.87 50.83
    Net PP&E 43.21 45.64 44.17 44.43 39.27 42.36 45.33 46.17 45.2 29.95 26.5
    Intangibles 7.31 8.03 8.45 7.75 6.3 5.83 6.1 5.87 5.6 24.24 20.77
    Other Long-Term Assets 1.45 0.47 0.42 3.04 8.39 6.2 3.2 2.76 2.05 1.94 1.89
    Total Assets 100 100 100 100 100 100 100 100 100 100 100
    Accounts Payable 28.88 35.1 36.43 28.18 26.2 26.11 26.79 23.82 25.21 17.12 30.49
    Short-Term Debt   2.82 4.12 2.67 0.63 1.27 1.38 2.45   3.45 2.14
    Taxes Payable 1.5 2.26 1.35 2.1 2.42 2.1 4.23 3.89 4.41 4.19  
    Accrued Liabilities                      
    Other Short-Term Liabilities 9.88 7.66 8.09 12.04 11.71 11.52 5.81 4.71 6.61 15.23 10.49
    Total Current Liabilities 40.27 47.84 49.99 44.98 40.95 41 38.2 34.88 36.22 39.98 43.12
    Long-Term Debt     5.57 4.76 3.55         10.4 11.89
    Other Long-Term Liabilities 1.33 1.23 2.01 4.5 8.57 5.7 2.95 3.26 2.44 2.91 2.78
    Total Liabilities 41.6 49.07 57.56 54.24 53.07 46.7 41.15 38.14 38.66 53.29 57.79
    Total Stockholders' Equity 58.4 50.93 42.44 45.76 46.93 53.3 58.85 61.86 61.34 46.71 42.21
    Total Liabilities & Equity 100 100 100 100 100 100 100 100 100 100 100
                           
    Liquidity/Financial Health 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 Latest Qtr
    Current Ratio 1.19 0.96 0.94 1 1.12 1.11 1.19 1.3 1.3 1.1 1.18
    Quick Ratio 0.22 0.14 0.14 0.17 0.2 0.13 0.2 0.21 0.29 0.19 0.27
    Financial Leverage 1.71 1.96 2.36 2.19 2.13 1.88 1.7 1.62 1.63 2.14 2.37
    Debt/Equity     0.13 0.1 0.08         0.22 0.28
                           
    Key Ratios -> Efficiency Ratios                      
    Efficiency 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 2016-03 TTM
    Days Sales Outstanding 6.53 6.08 6.89 6.42 6.01 5.87 7.04 7.22 6.63 6.25 11.57
    Days Inventory 71.41 76.44 82.45 75.84 76.82 81.82 88.47 90.4 90.44 82.7 98.84
    Payables Period 63.29 69.98 85.4 73.49 62.52 61.49 66.66 65.59 64.29 49.34 90.52
    Cash Conversion Cycle 14.65 12.55 3.94 8.76 20.31 26.2 28.85 32.03 32.78 39.61 19.89
    Receivables Turnover 55.88 60.01 52.99 56.9 60.69 62.2 51.87 50.58 55.04 58.41 31.54
    Inventory Turnover 5.11 4.77 4.43 4.81 4.75 4.46 4.13 4.04 4.04 4.41 3.69
    Fixed Assets Turnover 5.24 4.79 4.3 4.59 4.84 4.87 4.27 3.99 3.94 5.64 6.06
    Asset Turnover 2.22 2.13 1.93 2.03 2.01 1.99 1.88 1.83 1.8 2.04 1.7


    At first glance, while gross margins and revenues are going in the right direction, the record does not look fascinating.  But I noticed that a couple of insiders bought shares in this company in November 2016.  And the story gets better.

    The biggest recent development happened on April 10, 2015 when Majestic Wine bought the Naked Wines for 50 million pounds plus contingent consideration of 20 million pounds in shares, with revenues of 80 million pounds, growing 40% and EBITDA breakeven. The purchase expanded their market size by five fold and transformed Majestic Wine into chance to become a unique, customer led business model with world class online and CRM expertise. Over 70% of Naked Wines management’s potential consideration in Majestic’s ordinary shares (wholly contingent on performance). We will explain later why we think the initial signs after the acquisition look headed in the right direction.  The acquisition brought Naked Wines' impressive founder and CEO,Rowan Gromley, to run the entire group of Majestic Wine. Here is an excerpt from a news article that covered the purchase: "10 April 2015 Majestic Wine is taking over smaller online rival Naked Wines. The move will also see Naked Wines founder, Rowan Gormley, taking over as chief executive of the overall company. Majestic's previous chief executive, Steve Lewis, left the post in February. Majestic said the £70m deal would combine Naked Wines' online and e-commerce skills and Majestic's national store network. It also said trading in March was weak. Its shares fell 6% in early business.Rowan Gormley has founded a number of high-profile businesses. As well as Naked Wines, which started business in 2008, he was also behind the launch of Virgin Wines, the Virgin ONE Account and Virgin Money."

    A presentation about the acquisition can be found here: http://majesticwineplc.co.uk/wp-content/uploads/Acquisition-of-Naked-Wines-10-April-vFINAL.pdf
    and a Site Visit of Naked Wines can be found here: http://majesticwineplc.co.uk/wp-content/uploads/Naked-Wines-Norwich-investor-presentation-Final-1.pdf

    One cannot be bullish on this stock unless one is bullish on Rowan Gromley and his team. Rowan Gromley's story is fascinating itself.  Gormley immigrated to the UK from South Africa. He studied at Selborne College East London and the University of Cape Town. He trained as an accountant with Arthur Andersen in South Africa for three years before moving to the UK in 1987 to work in venture capital for Electra Capital Partners. Gormley was in private equity for seven years before going to work for Richard Branson in 1994. In http://www.businessinsider.com/what-richard-branson-taught-this-wine-ceo-2016-7, Branson hired him on a "gut feeling" and with no specific work for him.  Branson brought him to Virgin to identify new business opportunities. When he spotted financial services as a potential area for Virgin to explore, Branson asked Gormley to run it, and Virgin Direct (now Virgin Money) was born in 1995 with Gormley as CEO. Whilst at Virgin Direct, Gormley was also behind the launch of The One Account, now a part of Royal Bank of Scotland. After leaving Virgin Money, he launched three new start-ups. His first was Orgasmic Wines with the help of his business partner Laura Knight and his brother Clinton Gormley. The firm became Virgin Wines in 2000 when Richard Branson bought into the business. Laithwaites subsequently bought Virgin Wines and Gormley left the Company in June 2008. Gormley set up Naked Wines in December 2008 with eight of the old Virgin Wines team. Naked Wines was launched in the USA and Australia in 2012.

    In terms of incentives, he is incentivized to make this work through the 20 million pound contingency stock consideration. In addition, he seems to motivated by passion than just pure money.  He gave up his bonus, declined shares and gave his staff 7 million pounds.  Source: http://www.thisismoney.co.uk/money/markets/article-3707568/The-Wine-Chief-gave-bonus-hand-staff-7m-Rowan-Gormley-declined-shares-offered-him.html

    Here is an interview: http://www.telegraph.co.uk/foodanddrink/wine/11798513/Can-Rowan-Gormley-work-his-magic-on-Majestic-Wine.html

    Gormley announced his transformation plan for Majestic Wine in November 2015 and set the Group a new goal to achieve £500m annual sales by 2019.  Rowan brought his team over and set a simple goal of achieving $500M in sales by 2019 by studying obsessively on customer feedback and CRM data.  Majestic Wine is now on the 1st quarter of its second year of a 3 year plan to bring group sales above $500 million by Fiscal Year 2019.

    The new team seems to be practicing what they preached. http://www.businessinsider.in/Britains-biggest-wine-retailer-just-totally-changed-its-business/articleshow/49536699.cms

    Results, so far, are encouraging:

    The group's revenues are up 41.3% (11% pro-forma).  Naked Wine's revenues are up 27%.   And if you try to dig why this is so, it gets better. It is doing it the old-fashioned way of going back to the basics: through constant learning and asking of the customers.

    Pages 8-10 of the Annual Report http://majesticwineplc.co.uk/wp-content/uploads/annual-report-2016.pdf

    From the CEO letter:

    "It is very fashionable to claim to be profitable and nice. We don’t go along with that. We believe you have to be nice to be profitable. Just in case I have not made the point... we don’t just focus on customer retention, we obsess about it. Let me show you an example: The clever young man who runs Naked Wines UK, Eamon Fitzgerald, spotted something interesting. We ask all customers who interact with us to rate the experience on a scale of 1-5. Eamon noticed that customers who had a 5* experience were 62% more valuable than customers who had a 4* experience. 62%! He knows a seam of gold when he sees one, so he rebuilt our customer service function to deliver 5* experience. 1. We changed the name. From customer service to The Customer Happiness Team. 2. By reading the data behind our tests we can change how we motivate our teams. We stopped measuring the number of calls per hour and now only measure 5* ratings. 3. We put a new pay scheme in place where someone who does their job well can grow their income by 20% a year. The result… 5* ratings have increased from 86% to 90% this year and customer retention has increased from 78% to 80% in the same period."

    "Many companies regard investment as a necessary evil. We regard it as an opportunity to beat the market. Where we can spend more money and get a return we will. When we talk about investment, we don’t just mean bricks and mortar – we mean any opportunity to deploy cash to generate value. This means we are agnostic about whether we invest in Capex or Opex, in the UK or the US, in Naked Wines or the original Majestic businesses. An investment we made this year which delivered attractive ROI is wine quality. We measure our wine quality through “Buy It Again” (BIA) scores that our Angels give our wines. We saw that Angels with stronger BIA ratings across their fi rst orders deliver much greater loyalty and lifetime value. So we tested investing more into our wines; this reduced gross profi t at first but increased the BIA ratings by 10 basis points, increasing the lifetime value of our Angels."

    "We don’t debate, we test. Because that way we know what works, and we know it a lot sooner than if we spent ages debating it. Test and learn companies are also able to spot the stars of tomorrow; they are the ones looking to find a better way today. An example is the current recalibration of Naked Wines, away from a loss leading recruitment strategy to one where we focus on higher quality customers with higher retention through better quality wines. As a result we are recruiting less, but higher quality Angels and are focusing more on lifetime values. In the USA, for example, our customer attrition rate in the past year has fallen materially from these new measures. The end result of this is that we are delivering the same or better ROI, can open new channels of marketing, i.e. invest more, and will have a bigger business in three years than we would have had."

    "In short...Some early signs of success: I am delighted with our new team. But this is a three-year plan, all of our big projects are at a very early stage and still have a long way to go before we see their effects. Early signs... I am pleased to say reported Group revenue is up 41.3% (11.0% pro-forma). Due to the increased investment of £4.1m as part of our Majestic transformation programme Group adjusted profit before tax is 11.9% lower on last year on a pro forma basis, (-30.3% lower on a reported basis). Reported profit before tax of £4.7m was achieved after recognition of significant non-cash and one-off items. So the early signs are encouraging, but at the risk of repeating myself, this is the start of a three year plan – it is too early to say that it is working yet."

    "How are we doing in executing our plan? In our view, these five Group Key Performance Indicators are the best way of measuring how we are doing in delivering our “deliver value by doing the right thing” plan. We are in the process of embedding these across the Group, so there remain a number of “N/A”s in the table below which we will get populated in the coming months. However, as you can see, we have good progress in three of these in the Retail division. The one number that is going the wrong way is team retention. As we’ve said before we expect this to get worse before it gets better, as the changes we are making to the business bed in and staff decide whether the new Majestic is right for them or not."

    For the Christmas season of 2016, Majestic Wine (the retailer division) posted 7.5% like-for-like sales growth year-on-year in the ten weeks to January 2, 0.5% of which was a one-off due to transferred sales from closed stores. The group’s overall sales increased 15.3% during the period as retail sales were up 6.2%, driven by a 29.9% leap in sales across its Naked Wine business, which the retailer acquired in 2015.  Here is a presentation of analyst visit to Majestic Wine retail stores: http://majesticwineplc.co.uk/wp-content/uploads/WINE-Investor-Visit-FINAL-3.10.16-Website.pdf

    As a sign of confidence, the company reinstated its dividend ((For 2016, the company stopped its dividend after the acquisition of Naked Wines.  Company plans to reinstate the dividend in H1 2017 and have put in place a new policy of a base of circa 35% of adjusted earnings being returned to shareholders each year subject to no major changes in outlook. In addition, we intend to pay special dividends if management determines that excess cash is available that cannot be better used strengthening the balance sheet or reinvesting into the Group. The Board remains committed to maintaining a disciplined allocation of cash between deleveraging, growth and shareholder returns.)despite reporting a half-year loss on acquisition-related costs which offset a 13% rise in revenue.
    From the recent news: "The U.K. wine retailer swung to a pretax loss of 4.4 million pounds ($5.4 million) in the six months ended Sept. 26 from profit of GBP4.3 million in the corresponding period a year earlier. Majestic Wine put the loss down to charges related to its acquisition of Naked Wines. Revenue rose to GBP205.6 million from GBP181.6 million. The company said it reintroduced an interim dividend of 1.5 pence a share to reflect confidence in the future growth prospects. "

    LONG-TERM MODEL AND VALUATION

    At a current valuation of 2 times book, and ten times EV to operating earnings (reached in each of the years 2013 and 2014), there seems to be enough margin of safety.  The company's TTM revenue is $426 million, with growth achieved in all divisions(+6%, +8%, +10%, +27%).  If company achieves its goal of $500 million revenues by 2019, a 10% net margin would be about 50 million pounds in net margin.  A 12 times P/E would equate to a $600 million pound market cap, double what it is now. And if this company's online customer data-driven model becomes successful, then the incremental sale does not depend on incremental COGS (e.g. Netflix-like business model), this stock can be a home run.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Positive early results from a transformational acquisition of 2 years ago

    Recent Insider Buying in November 2016

    Attractive valuation

    Company going back to the basics: listening to its customers. 

    Simplified strategy and clear goal. 

     

     

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