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Majestic Wine PLC, Report on Business Performance

Executive Summary

Majestic Wine Plc. opened its original wine warehouse in 1980. This Wood Green, North London warehouse merged in 1991 with Wizard Wine, which, at that time belonged to Iceland, the frozen food group, (Sunday Times, 2010, p1). Majestic Wine was listed on the Alternative Investment Market in 1996. It acquired Lay & Wheeler In 2009, a specialist in Burgundy and Bordeaux products (Sunday Times, 2010, p1). The retailing of wines, beers and spirits is its principal business activity (Majestic Group, 2009, p1).

This business report analyses the group performance for two financial years, to 29th. March, 2010. It recommends, on the basis of appropriate performance ratios, (detailed in Appendices 1 – 4), that shareholders should buy more shares. Shareholders should augment their investment significantly if the group management shows an aggressive and focused plan for achievement of its objective of retailing from 250 stores, along with the deployment of a more aggressive capital gearing ratio and sharper operations management.

1. Introduction

Majestic has grown more than 12 fold from 1985, when it had only 12 shops, to 152 shops in 2010. It aims to expand its shop strength to 250 during the coming decade (Sunday Times, 2010, p1). Its sales are at a 10 year high, a result of the discarding of its policy of retailing only 12-bottle cases.

Off-licences, (establishments selling alcohol for consumption off the premises), could in the 1980s operate only for a few hours every day, and even fewer over weekends. Warehouses circumvented this rule by posturing as wholesalers, thus compelling their customers to buy bulk 12-bottle cases (Goodway, 2010, p1). Steven Lewis, the feisty CEO of Majestic, tested and subsequently rolled out, from November 2009, a model allowing customers to buy lots of 6 bottles at a time (Goodway, 2010, p1). The policy was instrumental in increasing the number of customers by 54000 to 472000 in the course of a year (LSE, 2010, p1).

The objective of this Business Report is to recommend to the shareholders of Majestic Wine PLC on augmentation or reduction of their investment in the company.

2. Analysis

2.1. Group Operations

The detailed computations in respect of the following ratios, relating to profitability, short-term liquidity and working capital, and long-term solvency are detailed in Appendix 1 - 3.


Profitability Ratios - Appendix 1: (LSE, 2010)

Year

2010

2009

(1) Gross Profit Ratio

21.3%

20.6%

(2) Net Profit Ratio

4.8%

1.6%

(3) Return on Investment (ROI)

21.0%

6.9%

Short Term Liquidity & Working Capital Ratios


- Appendix 2: (LSE, 2010)

Year

2010

2009

(1) Liquidity of Receivables

Days

18

21

(2) Liquidity of Payables

Days

99

113

(3) Current Ratio

0.99

0.94

(4) Acid-Test/Quick Ratio

0.30

0.27

(5) Cash Ratio

0.090

0.061

Long Term Solvency Ratios - Appendix 3: (LSE, 2010).

Year

2010

2009

(1) Debt Equity Ratio

0.15

0.18

(2) Capital Gearing Ratio

0.13

0.15

(3) Interest Cover Ratio

35.6

34.6

The profitability ratios of the company reflect a marked improvement in terms of revenues, cost of sales and ROI.

Most organisations opt to keep their debt low and cut their debt at the earliest (Jablonsky & Barsky, 2001). Whilst such inclinations arise from the need to be conventional and secure in business, excessive eagerness to diminish debt frequently leads to poor utilisation of obtainable debt, higher costs and uneconomical capital gearing (Jablonsky & Barsky, 2001, p 7-15). The long-term debts ratios reflect under capitalisation. The low gearing ratio reflects risk adverse tendencies, which can lead to slow growth in future.

The practically unchanged working capital ratios reflect the maintenance of sub-optimal liquidity levels. The weak acid-test ratio can lead to a difficult situation if the need for liquidity arises on account of contingencies that need to be swiftly addressed.

2.2. Group Performance

The group turnover for the 52 week period ending 29th March, 2010 at £33.2m was up 15.6 percent, with the profit before tax at £16.0m rocketing by an incredible 117 percent (LSE, 2010, p1). Appendix 4 summarises the group performance, as reported in the Preliminary Results for 2010.

The Group has experienced strong cash generation during 2010, with operational cash-flows of £21.2m during the year. This figure is £5.7m more than the £15.5m generated during the previous year, and has essentially come about from the improvement in the underlying profit before tax during 2010.

The Distribution and Administrative Costs have increased by 15.6 percent during 2009-10 as compared to the previous year. The EBIT (Earnings before finance costs and taxation) rose by 118.3 percent during the same period. The Profit before Taxation (PBT) grew sharply from £7.4m to £16.0m during 2009-10 year, registering an increase of 117 percent.

The sales to private customers, which make up the mainstay of the business, have shored up well, even though sales to corporate customers has been unsatisfactory. The company's French operations have been hurt by a stronger Euro (Majestic Group, 2009, p1). This contributed to an exceptional non-cash charge of £5.33m in 2009, which arose from the writing-down of the carrying value of the company's French retailing operations, Wine and Beer World (Majestic Group, 2009, p1).

The company's purchase policy of reducing the minimum purchase of 12 bottles to 6 has led to excellent results, even as it needs to be recognised that it may be difficult to replicate this year's soaring profits next year, because of the challenges involved in manoeuvring even more supermarket customers through its shop entrances (O'Doherty & Kuchler, 2010, p1).

Majestic is nevertheless working towards seizing mid-market space with a number of value-adding schemes like developing sales to gastro pubs, increasing its wine-tasting programmes, and growing its fine wines business (O'Doherty & Kuchler, 2010, p1).

Majestic's market share at 3.4% leaves abundant room for growth (O'Doherty & Kuchler, 2010, p1). Its share is trading at approximately 14 times its forecast earnings for 2011, higher than the average of its peer retailers, which are trading at an average of 12 to 13 times. Majestic, O'Doherty & Kuchler, (2010, p1) feel merits the premium and some more. The company's results are remarkable, considering that the underlying profit growth of 26 percent in 2010 has been achieved after accounting for the reduction of £5.3m in the carrying value of the French operations (Hemming, 2010, p1).

The business is well positioned to capitalise on its core strengths as the economic environment starts improving (Majestic Group, 2009, p1). The company's acquisition of Lay and Wheeler's fine wine business in 2009 has contributed £12.4m to 2010 sales (LSE, 2010, p1).

It is to the credit of the group that the total dividend for the year has been raised by 5.1 percent, to 10.3p per share, against last year's 9.8p, despite continuing market pressures (LSE, 2010, p1).

The underlying basic earnings per share (EPS) for 2010 at 18.4p were 31.4% higher than the 2009's 14.0p. The underlying diluted EPS for the same period at 18.3p rose 30.7% against the previous year's figure of 14.0p. The basic EPS for 2010 at 18.4p was 247.2% more than the 2009's 5.3p. The diluted EPS for 2010 at 18.3p was 245.3% more than the 5.3p achieved in 2009 (LSE, 2010, p1).

The average transaction expenditure at £129 for 2010 is 4 percent lower than 2009, despite a growth of 14.6 percent to 1.7m in transaction numbers (LSE, 2010, p1). The UK like-for-like sales for the 10 week period from 30th.March, 2010 to 7th.June, 2010 rose 7.3 percent (LSE, 2010, p1).

The company is expected to improve its sales in future. The retailer's professional credentials and good service levels have produced considerable loyalty amongst its patrons, which will be of assistance in the present economic climate. Majestic will also probably not be impacted by the recommended changes to alcohol pricing as its focus is more on the superiority of its offering than on its price (TradingMarkets.com, 2010, p1).

It is recommended that shareholders should steadily increase their investments. Larger positions should be taken if the group management shows persistent and aggressive efforts to achieve its growth target of 250 sites within a decade and change its conservative capital gearing. The company however needs to address its short term liquidity in order to be ready for short-term contingencies.

2.3. Mission Statement

An exhaustive search of corporate information on the company reveals that Majestic does not have a well-defined official mission statement. The company nevertheless aims to continually increase its retail outlets and open more than 250 in the coming 10 years. The company also strives to provide high quality wine and excellent service to its customers. The achievement of these objectives can be considered to be its mission.

The company's strategy focuses on increasing retail outlets and providing excellent value across product and price ranges and extraordinary customer service (Majestic Group, 2009, p1). The company's commitment to its mission is demonstrated by the steady increase in the number of retail outlets over the years and the numerous quality and performance awards it has won in a competitive scenario. The company has increased the number of outlets from 12 to 150 in the last 15 years. It was awarded the "High Street Chain of the Year", in 2008, by the International Wine Challenge Awards. The Group was also awarded The "Specialist Wine Chain of the Year" by Decanter magazine in 2008 (Majestic Group, 2010, p1).

The company's strength in customer services emanates from its policy of recruiting and retaining high quality graduate level staff, its continual investment in comprehensive training programmes, (widely accredited as best in the wine industry), and its focus on customer service, product knowledge and management (Majestic Group, 2010, p1).

Majestic augments its specialist credentials by focusing on staff training. New staff members are encouraged to obtain the "Wine and Spirits Education Trust's (WSET) Advanced Certificate" in six months. Several employees train further. Approximately 150 staff members presently have, or are qualifying for the WSET Diploma, even as 7 of Majestic's personnel received Excellence Awards from WSET in January 2010 (TradingMarkets.com, 2010, p1).

Majestic distinguishes itself from its competitors is by cultivating strong customer relationships (TradingMarkets.com, 2010, p1). The company hosts numerous events, like wine tastings, and courses to enhance customer knowledge of wine (TradingMarkets.com, 2010, p1). Such approaches, combined with high service levels, have facilitated the retailer in trading its clientele up the value chain (TradingMarkets.com, 2010, p1). Majestic aims to enhance its fine wine credentials by putting up fine wine display sections in all its stores in the next two years. Approximately around 50 percent of its present stores have such sections (TradingMarkets.com, 2010, p1).

2.4. Environmental Policies

Official communication by Majestic is noticeably silent on its environmental policies. Study of information available on the company's marketing strategy however reveals that the company is actively committed to a sustainable environmental policy of following green policies in its marketing operations (PRLog, 2010, p1).

The company stocks a carefully grown assortment of red and white organic wines. Such wines are created from organically produced grapes, developed to ensure taste and value for money, and are suitable for vegans and vegetarians (PRLog, 2010, p1).

Majestic's online marketing manager, Jamie McRonald explains that organic wine production is difficult and expensive since grapes are vulnerable to weather and animals. Such constraints make farmers disinclined to organic grape production (PRLog, 2010, p1). Organic wine is the ultimate part of the organic riddle, with fungicide and pesticide-free grapes maturing slowly on sun-soaked vineyards sans chemical safety, intervention or stimulation (PRLog, 2010). Whilst organic wines are by and large rarely stocked by the bulk of wine retailers because of their higher costs, Majestic actively stocks and sells organic wines. Such support will encourage farmers to take up organic farming and grow grapes without the use of environmentally damaging chemical fertilisers and pesticides.

The company locates its stores off High Streets. Whilst this decision stems from its policy of keeping rentals low, it helps in reducing petrol expensive traffic jams in busy shopping areas. Majestic should however aggressively adopt and publicise environment friendly policies because of its influential position in the supply chain. A relevant area of focus could be the collection, reprocessing and disposal of recyclable waste material.

2.5. Competitor Analysis: Strengths and Weaknesses

The retail wine market in the UK is intensely competitive; it is highly fragmented and basically serviced by supermarkets and off-license retailers (Management Today, 2007, p1). Majestic thus faces competition from other off-license retailers and supermarkets. Supermarkets have over the years continuously increased their share of the wine market (Management Today, 2007, p1). Led by Tesco's and ASDA-Walmart, supermarkets are increasing their sales of wines at the cost of off-license establishments, whose numbers fell from 5430 to 4400 between 2004 and 2009 (Management Today, 2007, p1). The recent winding up of the off-licence chain First Quench, a direct outcome of intense competition from supermarkets, led to the loss of 6000 jobs (Management Today, 2007, p1).

Whilst Majestic competes with supermarkets and off-licence chains and shops, its major competition obviously arises from supermarkets like Tesco, ASDA, Sainsbury's and Waitrose (How, 2006, p1). This competitive analysis of strengths and weaknesses treats supermarkets as one generic form of competition, even though there could be differences in the strategies, capabilities and weaknesses of individual supermarket chains (How, 2006, p1).

The national supermarket chains provide formidable competition to majestic wines. Their physical spread is immense and they are present in all High Streets, as well as in smaller towns and in rural settlements (Management Today, 2007, p1). They stock a huge variety of foods and household items as well as wines and attract far more footfalls than specialised wine retailers like Majestic. Such larger numbers of footfalls translate into greater sales because people tend to club food and wine purchases (Management Today, 2007, p1). Supermarkets are also by and large better located and many of them have substantial parking facilities, which help in attracting customers. Supermarkets also have the advantage of lower overheads, very substantial buying and stocking capacity, and bargaining power over suppliers. This enables them to offer better prices and work with lower margins (Management Today, 2007, p1).

Whilst supermarkets have much strength, it needs to be recognised that wines are only one of their many products and management attention towards selling of wines in supermarkets is far more diluted than in Majestic, a company which literally breathes and lives wine. The difference in attention and commitment thus leads to comparatively lesser market aggression and customer service. Supermarket employees are certainly less conversant with wines than those of Majestic. It is also possible that the smaller supermarket outlets may not have all customer wine preferences.

Majestic is dedicated to the retailing of wines. The company's strength arises from its very substantial management and staff capabilities in the sourcing, stocking and retailing of wines (TradingMarkets.com, 2010, p1). The company's employees are extensively trained in different aspects of wine retailing, and it strives to stock an extensive range of wines, including those made from organically grown grapes (PRLog, 2010, p1).

The company however suffers, in comparison to supermarkets, from fewer and unfavourably placed outlets, higher overheads, and lesser footfalls (O'Doherty & Kuchler, 2010, p1). The company counters this by locating its outlets off High Streets and uses its financial strength to buy wisely and extensively (O'Doherty & Kuchler, 2010, p1). It delivers at home and engages in numerous customer friendly activities to build customer loyalty (O'Doherty & Kuchler, 2010, p1).

References

Comiskey, E. E., & Mulford, C. W., 2000. Guide to financial reporting and analysis, New York: John Wiley & Sons.

Davey, J., 2009, Majestic Wine first-half profit up 9 pct, news.stv.tv, Available at: news.stv.tv/.../137498-majestic-wine-firsthalf-profit-up-9-pct/ - United Kingdom (accessed July 03, 2010).

Goodway, N., 2010. Majestic Wine's simple strategy tramples on supermarkets, London Evening Standard, Available at: http://www.thisislondon.co.uk/markets/article-23846082-majestic-wines-simple-strategy-tramples-on-supermarkets.do (accessed July 01, 2010).

Greenwise, 2010. Lightweight bottle helps wine industry cut CO2 and waste, Greenwise Staff, Available at: http://www.greenwisebusiness.co.uk/news/lightweight-bottle-helps-wine-industry-cut-co2-and-waste-1453.aspx (accessed July 01, 2010).

Hall, J., 2010. Tax rises drive wine makers out of UK, Telegraph.Co.uk, Available at: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/7488682/Tax-rises-drive-wine-makers-out-of-UK.html

(accessed July 01, 2010).

Hemming, R., 2010. Majestic Wine profits skyrocket, JancisRobinson.com, Available at: http://www.jancisrobinson.com/articles/a201006143.html (accessed July 01, 2010).

Hoovers.com, 2010. Company Description Majestic Wine PLC, Hoover's Inc, Available at: http://www.hoovers.com/company/Majestic_Wine_PLC/rtftxci-1.html (accessed July 01, 2010).

How, T., 2006, Majestic Wines: Tim How, www.growingbusiness.co.uk, Available at: www.growingbusiness.co.uk › ... › Success Stories (accessed July 03, 2010).

Jablonsky, S. F., & Barsky, N. P., 2001, The Manager's Guide to Financial Statement Analysis (2nd ed.). New York: John Wiley & Sons.
LSE, 2010. Preliminary Results, Regulatory Story, RNS London Stock Exchange plc, Available at : http://www.londonstockexchange.com/exchange/prices-and-news/news/market-news/market-news-detail.html?announcementId=10530622 (accessed July 01, 2010).

Majestic Group, 2009. Annual Report and Accounts 2009, Majestic Wine PLC, Available at: http://maj-cms.snowvalley.com/upload/pdfs/Investors/results2009.pdf (accessed July 01, 2010).

Management Today, 2007, The death of the off-licence, Available at: www.managementtoday.co.uk/news/978758/the-death-off-licence/(accessed July 03, 2010).

O'Doherty, J. & Kuchler, H., 2010. Majestic Wine benefits from new approach, The Financial Times Ltd. FT.com, Available at: http://www.ft.com/cms/s/0/ca12d6a8-777d-11df-802a-00144feabdc0.html (accessed July 01, 2010).

PRLog, 2010. Have You Tasted Our Simply Sublime Organic Wines? PRLog.com, Available at: http://www.prlog.org/10513815-have-you-tasted-our-simply-sublime-organic-wines.html (accessed July 02, 2010).

Robinson, J., 2010. When a bottle is better than a case, The Financial Times, June 12, 2010, Available at: http://www.ft.com/cms/s/2/925f00f0-74e0-11df-aed7-00144feabdc0.html (accessed July 01, 2010).

Robinson, J., 2007, Britain's independent wine merchants mushroom, Available at: www.jancisrobinson.com › Free for all (accessed July 03, 2010).

Siciliano, G., 2003. Finance for the non-financial manager, New York: McGraw-Hill.

Starups, 2010, Off-licence, Available at: www.startups.co.uk › ... › Business buyer guides(accessed July 03, 2010).

The Sunday Times, 2010. Briefing: Majestic Wine, The Sunday Times, Times Newspapers Ltd., June 13, 2010, Available at: business.timesonline.co.uk/tol/business/industry.../article7148907.ece (accessed July 01, 2010).
TradingMarkets.com, 2010. Majestic Wine results reveal vintage year, TradingMarkets.com, Available at : http://www.tradingmarkets.com/news/stock-alert/mjwnf_majestic-wine-results-reveal-vintage-year-982636.html (accessed July 01, 2010).
Wilson, A., 2010. Majestic Wine sales haven't lost their fizz, Telegraph.co.uk, Available at: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/7734138/Majestic-Wine-sales-havent-lost-their-fizz.html (accessed July 01, 2010).

Appendices

Appendix 1: Profitability Ratios (LSE, 2010)

Year

2010

2009

Sales

£000

233220

201794

Cost of Sales

£000

183528

160148

Gross Profit Margin

£000

49,692

41,646

(1) Gross Profit Ratio

Gross Profit Margin/Sales

21.3%

20.6%

Profit after Taxation

£000

11280

3,262

(2) Net Profit Ratio

Net Profit /Sales

4.8%

1.6%

Net Worth

£000

53,648

47,616

(3) Return on Investment (ROI)

Profit after Tax/Net Worth

21.0%

6.9%

Appendix 2: Short Term Liquidity & Working Capital Ratios (LSE, 2010)

Year

2010

2009

Current Assets

Inventories

£000

38511

37752

Trade & Other Receivables

£000

11594

11531

Financial Instruments at Fair Value

£000

233

834

Cash and Cash Equivalents

£000

4774

2572

55,112

52,689

Current Liabilities

Trade & Other Payables

£000

49778

49724

Bank Overdraft

£000

2453

3950

Current Tax Liabilities

£000

2461

1515

Other Current Liabilities

£000

1079

899

55,771

56,088

(1) Liquidity of Receivables

Days

Accounts Receivables *

18

21

Days in year / Annual Sales

(2) Liquidity of Payables

Days

Accounts Payables *

99

113

Days in year / Cost of Sales

(3) Current Ratio

Current Assets/Current Liabilities

0.99

0.94

(4) Acid-Test/Quick Ratio

Current Assets less Inventories /

Current Liabilities

0.30

0.27

(5) Cash Ratio

Cash + Marketable Securities /

Current Liabilities

0.090

0.061

Appendix 3: Long Term Solvency Ratios (LSE, 2010)

Year

2010

2009

Long Term Debt

£000

7810

8495

Shareholders' Funds

£000

53648

47616

LT Debt + Shareholders Funds

£000

61,458

56,111

(1) Debt Equity Ratio

Total Debt / Shareholders Funds

0.15

0.18

(2) Capital Gearing Ratio

L.T. Borrowing / (L.T. Borrowing +

Shareholders' Funds

0.13

0.15

Earnings Before Interest & Tax (EBIT)

£000

16466

7542

Interest Costs

£000

462

218

(3) Interest Cover Ratio

EBIT / Interest Costs

35.6

34.6

Appendix 4: Company Operational Performance (LSE, 2010)

Year

2009

2010

Variance

£000

£000

£000

Sales

201794

233220

15.6%

Cost of Sales

-160148

-183528

14.6%

Gross Profit

41,646

49,692

19.3%

Distribution and Administrative Costs

-29404

-34003

15.6%

Goodwill Impairment Charge

-5331

-100.0%

Other Operating Incomes

631

777

23.1%

Operating Profit

7,542

16,466

118.3%

Profit on Disposal of Property

-

-

Profit before finance costs and taxation (EBIT)

7,542

16,466

118.3%

Finance Revenue

55

7

-87.3%

Finance Costs

-218

-462

111.9%

Profit before taxation (PBT)

7,379

16,011

117.0%

Income Tax

-4117

-4731

14.9%

Profit after Taxation (PAT)

3,262

11,280

245.8%

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