Majestic Wine’s (LSE: MJW) shares are slumping this morning, currently down 13% at the time of writing, after the company issued a quasi-profit warning for 2015.
The group announced that while UK store sales, for the ten weeks of Christmas trading from October 28 to January 5, 2015, were up 3.7%, like-for-like store sales growth was only 1.1%. Unfortunately, this growth came at the expense of 50 basis points of gross margin.
Essentially, the group had to lower prices to stay competitive in a market where supermarkets, like Tesco and Aldi, are offering a similar product for a lower price.
What’s more, within today’s trading update Majestic’s management warned that 2015 will be a tough year for the company:
“Majestic delivered like for like sales growth of 1.1 percent in a difficult Christmas trading period characterised by promotional activity and we are now focused on delivering our final quarter’s trading. We anticipate this competitive pricing environment will continue throughout much of 2015.”
And this competitive pricing environment can be traced to the supermarket price war, which is only just getting started. So, it seems as if 2015 is shaping up to be a tough year for Majestic.
Majestic’s biggest problem is the fact that the company has no international exposure. Apart from a few stores in Calais, the group’s success is highly dependent upon the state of the UK economy and competitive environment.
Moreover, both SAB and Diageo offer unique products. Diageo for example manufactures the world’s bestselling vodka as well as Johnnie Walker whiskey, one of the world’s most revered whisky brands. SAB produces Snow, China’s best selling beer.
But the biggest benefit SAB and Diageo have over Majestic is their pricing power. Indeed, the two beverage behemoths can decide at what price they want to sell their products to retailers, giving them a certain degree of control over their profit margins.
Majestic lacks this pricing power. While the group can extract a certain amount of pricing leverage over suppliers, it still has to compete with rival stores. As today’s announcement shows this competitive environment can force the group to sacrifice profit for sales growth.
Paying for quality
Still, you have to pay a little bit extra for quality companies like SAB and Diageo which have international exposure, a portfolio of world leading brands and pricing power. Specifically, after today’s slump Majestic is trading at a forward P/E of 13.7 and the company offers a dividend yield of 4%. In comparison, SAB and Diageo trade at a forward P/E of 19.5 and 19.3 respectively, the FTSE 100 trades at an average P/E of around 15.
Nevertheless, in this case it’s worth paying a bit extra for the international exposure and product portfolios SAB and Diageo offer.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Majestic Wine. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.