Shares in high-street wine retailer Majestic Wine (LSE: MJW) and budget ladies wear retailer Bonmarche Holdings (LSE: BON) both slid when markets opened this morning, but for quite different reasons.
Let’s take a look at Majestic first.
Majestic has agreed to buy online wine retailer Naked Wines for £70m, which is roughly equal to one year’s sales at the start up, where sales rose by 40% to £74m last year.
That figure is pricing in a lot of future growth, in my view, given that Majestic currently trades on 0.75 times sales, despite being profitable: Naked Wines reported a £3.3m loss last year.
The theory behind the deal is that Naked will power Majestic’s online and international expansion, while Majestic’s store network will provide a click-and-collect service for Naked’s UK customers.
Naked chief executive Rowan Gormley will become chief executive of the enlarged Majestic, confirming, for me, that his online growth plan is a key part of the deal.
What about the financials?
Of the £70m Majestic will pay for Naked, £50m will be paid up front in cash, with up to £20m paid in shares, dependent on future performance.
The £50m cash element will be funded with new debt. To help fund repayments, Majestic has cancelled the final dividend for 2015, and the interim payout for 2016, promising to gradually reinstate the dividend by 2018.
As a result of these changes, Majestic’s valuation — which looked undemanding on a forecast P/E of 11 and prospective yield of 5% — has now become less appealing.
For this deal to succeed, Majestic has to convert Naked’s loss-making online sales into profits and maintain the start-ups growth rate.
This deal could be transformative for Majestic, but it also carries considerable risk.
Bonmarche
Budget retailer Bonmarche issued a year-end trading update this morning, revealing that like-for-like store sales fell by 4.4% during the 12 weeks to 28 March, but rose by 4% over the last year as a whole.
Profits for the year are expected to be in-line with expectations of around 20p per share, meaning that the shares trade on a forecast P/E of 13, after falling 6% today.
Today’s update wasn’t disastrous, and Bonmarche does have a strong balance sheet, with net cash of around £12m. However, the firm’s operating margin of 6% is pretty average, and today’s update suggests sales growth could be slowing.
Overall, my view is that the shares are probably fully priced at 260p.
