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Simply Majestic

These are tough times for every retailer, whether £20bn FTSE 100-listed grocery giant Tesco (LSE: TSCO) or £238m vino specialist Majestic Wine (LSE: WINE). Majestic is down almost 13% as its half-year results showed a reported loss before tax of £200,000, against a profit of £3.1m last time.

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Group CEO Rowan Gormley put it bluntly: We’re doing well in a tough market.” He said Majestic set out a plan in April and is delivering on it. “That plan was to accelerate growth by investing in new customers and, so far, the plan is on track.” 

Lack of sparkle

Today’s figures showed group revenue up 5.4%, boosted by its previously announced investment plan, while underlying growth at its Naked Wines operation accelerated from 11.6% to 14% year-on-year. However, this is costing money with new customer investment in Naked up £3m to £7.9m. As Gormley put it: “We’ve been investing more, and as a result profits are down.”

He said the group is on track to meet its £500m full-year sales target while warning the market is tough. Anticipated growth this year now looks likely to be “flat at best”, hence the share price rout.

Wine and dine

I like Gormley’s straight talk. We were planning for tough times and we’re investing through tough times because we know that’s the route to a more profitable future,” he said. I also like that its business is now almost 45% online and more than 20% international, but I can’t raise a glass to its pricey forecast valuation of 24.5 times earnings, which has been a worry for some time.

Majestic is down 35% over five years but Tesco is down a heftier 41%, despite CEO Dave Lewis’s impressive overhaul, including the £4bn purchase of wholesaler Booker Group, which already appears to be bearing fruit. Like all the big supermarkets, it is under huge pressure from German discounters, and there is little sign of that easing in any way, as Aldi and Lidl now have a 13.1% share of the market between them.

Tesco to go

Tesco is still more than twice their size at 27.5%, according to Kantar Worldpanel, although is continuing its slow slide since it dipped below 30% in January 2012. Tesco has done well to hold on to what it’s got, but investors have not reaped the benefit. I am wary of a business with group operating margins of just 2.94%, although it recently declared itself on track to achieve its ambition of 3.5%-4% by 2019/20.

Earnings per share growth forecasts look promising, at 17% and 20% over the next two years, while its valuation is a reasonable 14.5 times forward earnings. The dividend is in recovery and investors now get a forward yield of 2.5%, covered 2.7 times, giving scope for future progression. Analysts are predicting a 3.6% yield by 2020. 

However, my colleague Royston Wild expects that Tesco’s share price will keep sliding and I also think there are better options for your pension.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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