WINE - Majestic Wine Plc

[bjakes00]

Company

 

Majestic Wine is a UK based wine specialist that operates in four segments:

1. Majestic Retail (55% sales / 53% Adj. EBIT) - UK wine retailer focused on customer experience. Transitioning to multi-channel retailer with control of the last mile delivery

2. Naked Wines (33% sales / 34% Adj. EBIT) - Funding platform for independent winemakers, who make exclusive wines at preferential prices. Subscription business model with direct marketing expertise and multi-year customer retention

3. Commercial (9% sales / 9% Adj. EBIT) - On-trade supplier that helps businesses to make their wine lists more profitable by offering national pricing and scale with local delivery and training

4. Lay & Wheeler (3% sales / 4% Adj. EBIT) - A specialist fine wine merchant

 

Valuation

 

Market Cap: £290m

Net Debt: £8.4m

EV: c. £300m

 

EV/TTM EBIT: 16.5x

TTM FCF Yield: 8.6%

2018A ROCE: 12.4%

 

Thesis

 

- Company operates in a large, fragmented market with a long runway and currently commands a small share of each market that it operates within (Retail - 10%; Naked - 1%)

- Employs a trial based approach to customer acquisition and has calculated that there is a 4.7x cash-on-cash return (15% IRR) for each £1 spent on customer acquisition

- Customers tend to be sticky given the excellent level of customer service and value proposition

- At their latest investor day, they have reiterated the potential for customer acquisition spend and guided to the fact that EBIT will be depressed over the next 1-2 years as revenues are re-directed to acquiring new customers rather than returned to shareholders

- Business is run by serial entrepreneur Rowan Gormley (founded Virgin Money and Naked Wines). The executives have a large part of their wealth in the business and are choosing to focus on the long-term growth opportunity

- Business has delevered post the Majestic/Naked merger and the balance sheet is in sound condition

[whistlerbumps]

I really like CEO Rowan Gormley.  Anyone interested should look through his presentations and shareholder letters.  I think he is a long-term thinker who is very focused on driving LT shareholder value.

[bjakes00]

Agreed, he seems to be focused on creating value rather than taking rents.

 

Would be keen to hear thoughts on their current plan. They appear confident that they are onto something with their customer acquisition strategy and the potential returns. If you can get 15% CAGR on customer acquisition and maintain your overheads relatively flat, the economics should take care of themselves.

[whistlerbumps]

This one seems pretty interesting here.  Naked should generate >200mln of revenues next FY so that is ~1x revenues.  Given strong competitive position, solid retention and proven profitability, that seems like a cheap multiple for a growing online subscription-based retailer.  UK retail environment is obviously terrible but franchise partner program and conceirge seem interesting and Majestic Retail is still growing and profitable.  Good mgmt team here as well with a long-term focus.

 

Seems like investors got spooked by weaker than expected results in retail and the large increase in spending at Naked which lowered 2019 results.  Given long-tail of Naked repeat customers, the increase in spending should be value accretive over the long-term.

[bjakes00]

Yes this one will be a longer term play with no immediate catalysts. The retail apocolypse will continue and if their brick n mortar retail business stands still I will be more than happy - good to see them rationalising some sites already. On the other hand their shift to the internet channel (concierge) looks promising and time will tell whether that works out (of course, Brexit uncertainty in the short term will not help).

I continue to believe Naked Wines is a great business with growing operations in all of their geographies, a solid business model and an attractive customer proposition.

Feels like its a three year story from here though...(esp. if you bought in before the recent strong de-rate).

 

[whistlerbumps]

Agreed.  Going to take a while but I think there is more than enough upside to make it worthwhile.  As big growth spending from this year normalizes, Naked profitability should explode over medium term.

[whistlerbumps]

Reassuring Xmas trading update.  Retail grew LFLs but sacrificed some margin and Naked (which is far more important) accelerated sales to ~16% vs. 12% in H1 and grew GPM.

[aglittell]

Any thoughts on the restructuring?

[whistlerbumps]

While the share price clearly disagrees with me, I think its a long-term positive.  Naked was significantly undervalued as part of Majestic and represents the vast majority of the value here.  Once the transaction is complete, investors will be able to purchase Naked as a pure play. 

 

Naked has a opportunities for continued LT growth due to its large TAM, attractive economics, and the proven ability to be profitable (as opposed to many subscription businesses where the opportunity is just theoretical.  I would argue that its worth significantly more than the current share price and this value will be greater recognized without Majestic (which takes up the majority of investor attention IMO despite being a minority of the value).

 

For Majestic, I view this as skating to where the puck is going.  UK high street retail continues to from the combination of rising costs (rent/wages) and lowering demand (shift to online).  While Majestic is still profitable with + LFLs, that may not be in the case in the future.  Best case, they sell it in entirety for a decent price.  The most likely outcome though is that they sell a portion of the stores + Majestic brand + commerical + Lay & Wheeler (perhaps separate) and retain some of the stores which they rebrand to Naked.  Worst case, they can't find a buyer and shutter stores + rebrand.  In that case, they expect the profits from selling freeholds to largely offset restructuring cash costs.  Thus, I think Majestic is worth between a small positive and small negative amount. 

[bjakes00]

Naked is clearly the better business with the better long term opportunities and I totally agree that the self-reinforcing effects of more customers = better winemakers = broader range of offering = better customer proposition are evident.

 

It makes you question why the merger was done in the first place but hoping management have a good idea of what they'll do with the Majestic retail footprint to leverage the Naked platform.

 

It has the hallmarks of a business that has an identified an interesting reinvestment opportunity and is now throwing the kitchen sink at it - its clearly a concentrated bet that they believe in.

 

On the flip-side it seems that Protector Forsikring is slowly throwing the towel in on their position - they've decreased their holding from 6.1% to 4.3% over the past two days from reg filings (and we probably won't see from here how much further they are decreasing it).

 

Keen to hear other peoples thoughts? I note that Constellation Software bought a company that is involved in the retail wine sector: https://www.jonassoftware.com/About_Us/Latest_News/Jonas_Software_Acquires_WineFetch,_Inc

 

[Spekulatius]

Any thoughts on the restructuring?

 

Main retail business is under pressure. Times will be tough. Dividend will be cut to preserve cash. Restructuring story - it not a growth stock any more.

[whistlerbumps]

Naked is clearly the better business with the better long term opportunities and I totally agree that the self-reinforcing effects of more customers = better winemakers = broader range of offering = better customer proposition are evident.

 

It makes you question why the merger was done in the first place but hoping management have a good idea of what they'll do with the Majestic retail footprint to leverage the Naked platform.

 

It has the hallmarks of a business that has an identified an interesting reinvestment opportunity and is now throwing the kitchen sink at it - its clearly a concentrated bet that they believe in.

 

On the flip-side it seems that Protector Forsikring is slowly throwing the towel in on their position - they've decreased their holding from 6.1% to 4.3% over the past two days from reg filings (and we probably won't see from here how much further they are decreasing it).

 

Keen to hear other peoples thoughts? I note that Constellation Software bought a company that is involved in the retail wine sector: https://www.jonassoftware.com/About_Us/Latest_News/Jonas_Software_Acquires_WineFetch,_Inc

 

The below interview has a good discussion of the transaction as to why it makes sense now.  In short, when the merger was done, Majestic had excess cash with no investment opportunities and Naked needed cash to grow.  Now Naked can stand on its own so it doesn't need Majestic's cash anymore.

 

Speaking exclusively to the drinks business this morning, Rowan Gormley scotched some of the speculation around Monday’s surprise announcement that Majestic is rebranding as Naked Wines and selling off its UK retail business to concentrate on its growing online wine subscription service, saying the decision gave the company more options.

 

Gormley admitted that while selling the retail business now was not the “comfortable” thing to do, it gave more options.

 

“Lots of people have asked why are we doing this now and the answer is because we can, not because we have to. While that may feel radical to some people, by doing it now we have options,” he explained.

 

“We’re doing it now while the business is profitable not when we’re against the wall in five years time.”

 

Currently the group is “testing the market” before unveiling the final scale and timescale of the sale in June, but Gormley argued that this profitability meant Majestic was more likely to be sold as an ongoing concern, arguing that it was not in anyone’s interests to close down a profitable business.

 

“My expectation is that Majestic will keep as an on-going concern, which is fundamentally different to an LK Bennet, which was game over,” he told db.

 

“It may be split 10/90 one way, or 90/10 another way or 50/50, it doesn’t matter – but there will likely to be two businesses at the end of this, one of them is Naked, one of them is Majestic. They will still have a bunch of customers and there will still be opportunities for suppliers, and everyone else,”

 

“It’s a profitable business, and therefore it’s not in anyone’s interest to be shutting down a profitable business. What we’re saying is it is won’t be part of this business.”

 

Inevitable?

 

Gormley denied that reversing the merger had been inevitable, arguing that the logic that made them an “excellent strategic fit” three and a half years ago had changed over the last two years.

 

 

Majestic CEO Rowan Gormley with Naked Wines md Eamon FitzGerald at the time of the merger

 

“The strategic logic was that Majestic was generating cash and Naked was consuming cash. One of the fundamental things that’s changed is that Naked is no longer consuming cash, so the need to have those two companies together no longer exists” he told db. “If you looks at results for last two years, the pattern is well established. Online sales are growing at 20- 30%, and offline sales are shrinking, so what we’re doing with stores needs to change.”

 

There was, he added “a revolution” happening in retail – which wasn’t necessarily bad news, but in order to be one of the winners, the group needed to pick which side to back, a decision it said it flagged it “pretty heavily” six months ago.

 

It had become increasingly clear that Naked had the opportunity to be “a very substantial business” he continued, but to fulfil that would take more focused investment and time.

 

“Although we believe strongly Majestic can also be a winner, we don’t have money and resources to do both. One way or another we need to have a single business model and one brand, and therefore we either need to migrate [the businesses] together or take them further apart,” he said.

 

Increased cost base

 

Another factor to be taken into account was the worsening economic climate and Brexit uncertainty which had increased the cost base of up to £40million, though changes to the currency and exchange rate, impact of duty, rises in the minimum wage and rates increases, which Gormley said, “hadn’t helped”.

 

“When we first started we could see there were opportunity to improve the retail operation and the team have done a spectacular job doing exactly that. But I’ve previously described it as running really hard up a down escalator and when £40 million of cost gets dumped down on you, it’s really hard for a business to continue to grow it. And the fact that they have managed to do so is all the more credit to them.”

 

“We took a company with declining sales, but sales of £20 million, we’ve reversed the sales decline, and though we’ve had £40 million costs added through no choice of our own, we’ve still got it in double digit profitability.”

 

Residential or retail?

 

However he admitted that while there were retailers looking for space to expand, there was also the option to sell for residential, as already revealed by db.

 

“The alternative use for a lot of our sites is to develop them into flats for example, and not necessarily as retail, but there are retailers who are looking for space,” he said.

 

He added that there was still a future for specialist wine retailers.

 

https://www.thedrinksbusiness.com/2019/03/interview-majestic-not-likely-to-disappear-from-high-street-ceo-insists/

[whistlerbumps]

Any thoughts on the restructuring?

 

Main retail business is under pressure. Times will be tough. Dividend will be cut to preserve cash. Restructuring story - it not a growth stock any more.

 

I disagree with this.  Going forward, the company will sell Majestic and be left with the fast growing Naked business.  They will probably cut the dividend but that is a result of having opportunities to invest capital at 4-5x LTV/CACs which is a much better use of capital than paying it out to shareholders.  Post the sale in June, WINE will be a much cleaner growth story.

[_JJ_]

Any thoughts on the restructuring?

 

Main retail business is under pressure. Times will be tough. Dividend will be cut to preserve cash. Restructuring story - it not a growth stock any more.

 

I disagree with this.  Going forward, the company will sell Majestic and be left with the fast growing Naked business.  They will probably cut the dividend but that is a result of having opportunities to invest capital at 4-5x LTV/CACs which is a much better use of capital than paying it out to shareholders.  Post the sale in June, WINE will be a much cleaner growth story.

 

Do they disclose how they calculate the LTC/CAC ratio? Naked seems like an interesting business, but I’m sceptical about using LTV/CAC ratio considering rising ‘fixed’ and distribution costs. I’m afraid they will underestimate this trend. On the other hand, there should be room to improve gross margins.

[whistlerbumps]

They provide a fair amount of discussion on their LTV vs CACs in their presentations on the IR page.  I'd recommend starting there.

[Spekulatius]

I poked a bit around the IR website. The CEO looks a bit rough around the edges. - does he get high on its own supply?

 

Also, they claim that the wines available are a better value than retail, but when looking at specific wines I know a bit about (Northern CA wines) , I don’t think that is necessarily the case. Their customer acquisition seems to be via $100 coupons. That might lead to cheapskates trying this out using their name, wife’s name, than kids, dogs etc....

 

Has anyone tried this actually out as a customer? That seems to be a good way to do some research and maybe tried it out? Seems to me that looking at this from a customer perspective can give a lot of insight. I can see the social networking aspect adding value. I think getting into “wines” can be a bit intimidating for someone who gets beyond beers into wines, as the low end is unappealing and the higher end a bit snobbish.

[aglittell]

I poked a bit around the IR website. The CEO looks a bit rough around the edges. - does he get high on its own supply?

 

Also, they claim that the wines available are a better value than retail, but when looking at specific wines I know a bit about (Northern CA wines) , I don’t think that is necessarily the case. Their customer acquisition seems to be via $100 coupons. That might lead to cheapskates trying this out using their name, wife’s name, than kids, dogs etc....

 

Has anyone tried this actually out as a customer? That seems to be a good way to do some research and maybe tried it out? Seems to me that looking at this from a customer perspective can give a lot of insight. I can see the social networking aspect adding value. I think getting into “wines” can be a bit intimidating for someone who gets beyond beers into wines, as the low end is unappealing and the higher end a bit snobbish.

 

A family member of mine was introduced to Naked and gave it a shot. Received the $100 coupon as a trial and then continued with subsequent orders before becoming an angel - obviously anecdotal but I think the value proposition is there. Wine lovers are able to try great wine they might not otherwise be able to and feel as though they are supporting these producers, all without leaving their home.

 

Gormley may be a bit eccentric, but I like to think passion and the ability to articulate that is a positive for a manager of a wine company...

[whistlerbumps]

Agreed that Gormely is a bit different but I think its in a good way (which is probably why Richard Branson hired him).  Read some of his shareholder communication and you will see that he is focused on long-term value creation.  His salary is modest compared to his equity ownership (6%) so I think he is aligned with shareholder interests

 

Re the service, I think the proof is the in numbers.  Naked will generate >$200mln of revenue in FY 4/19.  Unlike other subscription clubs, they are not burning money with the hopes of someday being profitable but are instead materially profitable (mid single digit EBIT margins) today even with their customer acquisition spending.  I think the results are proof that the model has value.

 

[bjakes00]

I am a subscriber and know many friends that are subscribers and use the service on a regular basis. Anecdotally, I have my in-laws in town and they couldn’t believe the diversity of wines I have from Naked (country-wise and quality-wise).

I know you could buy wines from all over the world from your local store but I see the value in getting more customers onto the platform that can fund great wine makers who can provide decent-quality wine at a good price.

In any event, I don’t think it’s easy to replicate that dynamic (especially the good winemakers and community).

However, I would like to see them being selective in acquiring customers, as in they shouldn’t be offering customers £100 vouchers that end up coming to the platform via word of mouth!

[Spekulatius]

Agreed that Gormely is a bit different but I think its in a good way (which is probably why Richard Branson hired him).  Read some of his shareholder communication and you will see that he is focused on long-term value creation.  His salary is modest compared to his equity ownership (6%) so I think he is aligned with shareholder interests

 

Re the service, I think the proof is the in numbers.  Naked will generate >$200mln of revenue in FY 4/19.  Unlike other subscription clubs, they are not burning money with the hopes of someday being profitable but are instead materially profitable (mid single digit EBIT margins) today even with their customer acquisition spending.  I think the results are proof that the model has value.

 

BJakes and whistlerbumps - thank you so much for your input, it’s very helpful. I can the the value of the platform increasing as more and more winemakers and customers get on it and I think the community aspect is valuable as well. I might try this out myself.

[bjakes00]

Wanted to flag that it is worth reading the executive compensation part of the annual report. The company is clearly setup for and focused on creating shareholder value. The CEO turned down an increase in salary as growing the value of his stake in the company is far more meaningful in the long run. Additionally he gave up incremental stock based comp so that more of it could be allocated to employees and incentives aligned.

Another positive sign.

[aglittell]

Gormley also owns upwards of 6% of the company, if I recall correctly.

[whistlerbumps]

Yup.  Rowan owns ~6%, voluntarily waived his bonus entitlement in FY 17, and is not even the highest paid employee at his company.  He also previously declined his LTIP bonus and instead asked for it to be distributed to his staff.  Overall, I think he is highly aligned with shareholders and fully focused on delivering long-term value.

[bjakes00]

Extensive write-up on VIC: https://www.valueinvestorsclub.com/idea/Majestic_Wine_PLC/4417954314

[whistlerbumps]

They sold the Majestic Retail and commercial division for 100mln with a potential additional 10mln to come from a rumored sale of Lay & Wheeler.  At these prices, I think you are getting a very cheap valuation on the remaining Naked business.