June 13, 2011 9:07 am

Taste for premium wine boosts Majestic

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Majestic Wine plans to double the number of its UK stores after revealing a robust set of full-year results which showed that consumers have not lost their taste for premium wine in the downturn.

Group pre-tax profits increased by more than a quarter to £20.3m in the year to March 28, driven by strong sales to business customers such as gastropubs, as well as a 5.3 per cent uplift in retail sales at its 160 stores.

However, its shares dipped more than 4 per cent on Monday as investors took profits, prompted by analysts’ caution over its expansion strategy and the dominance of supermarkets, who control around 80 per cent of the UK wine retail market.

Business customers now contribute nearly a quarter of Majestic’s total sales, which rose 10 per cent to £257m in the period.

A key factor has been booming sales of fine wines costing more than £20 a bottle, which were up 24 per cent on the previous year.

Steve Lewis, chief executive, said he believed the retailer could ultimately expand to 330 stores, up from a previous target of 250, but would stick to its strategy of targeting edge-of-town locations with dedicated car parking.

“Parking is absolutely critical, and as we’re off the high street, we don’t pay high street rents,” he said, referring to the collapse of high street rival Oddbins. “However, we simply can’t find stores quickly enough,” he added, stating that 12 openings a year was likely to be the maximum, which would be funded from existing cash flows.

Mr Lewis expects to pick up a slug of Oddbins’ £80m annual revenues, reporting a “surge” of credit account applications from corporate customers in the last six weeks.

The group is proposing a final dividend of 9.7p per share, pushing the year’s total to 13p, a 26 per cent increase.

However, some retail analysts questioned the expansion strategy, expecting internet sales to rise beyond the current 10 per cent share in the future. “Longer term, they could be better off taking some regional distribution centres, known as ‘dark stores,’ assuming internet sales will take off, rather than a physical presence in 330 locations,” said Sanjay Vidyarthi, retail analyst at Espirito Santo.

“The Majestic model has held its own against the supermarkets remarkably well, but there is also a question mark surrounding what the supermarkets will do when the consumer environment improves. Majestic has been granted a window of opportunity to take market share as the supermarkets have focused on value, mass market wines, but they could have another go at the £6 to £10 bottle market in the future.”

Majestic’s shares lost 20.25p, or 4.3 per cent, to close at 450p.

FT COMMENT

With a rating of 18 times consensus 2012 earnings, Majestic’s shares look frothy compared to the retail sector average of 11 to 12 times. The retailer’s specialist niche has always commanded a premium rating, but difficulty finding sites puts a natural cap on growth. Shares have risen 65 per cent in a year, and look high enough.

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