Tesco keeps head above water and Majestic Wine nears major turning point

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“Global markets struggled to find direction on Thursday with European shares rising and Asian shares falling,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 advanced 0.2% to 7,385 thanks to strength among miners and construction stocks.

“Blue chip stocks falling as a result of trading without the rights to their latest dividend included housebuilder Persimmon, media giant WPP and utilities group Severn Trent."

Supermarkets: Tesco and Morrison

Today’s trading update from supermarket Tesco was probably about as good as could have been expected under the circumstances.

“The build-up to last year’s World Cup and the sunny temperatures meant it was always going to be a tough ask to generate much like-for-like growth this time round as the UK endures some very soggy weather.

“Wholesaler Booker is the star turn and this helped compensate for problems in its Polish business – as the slogan says ‘every little helps’.

“The recently announced decision to exit the UK mortgage market also looks vindicated by that division’s weak performance.

“Outlook comments are light on detail with CEO Dave Lewis likely keeping some rabbits in the hat for Tesco’s big investor day on 18 June.

“Competitive threats continue to loom large. Recent industry figures showed the ongoing advance of German discounters Lidl and Aldi and this morning Morrison announced an expansion of its joint venture with Amazon.

“Amazon is a name which can strike fear into the hearts of established operators in a host of different industries and Tesco is unlikely to be an exception.

“At least investors can take comfort from having a man in charge who has a clear plan for the business.”

Majestic Wine

“We’re told the wheels are in motion for Majestic Wine’s legacy shops business to be sold, leaving the group as an online-focused entity called Naked Wines. But is that really the right move?

“There are disadvantages to being an online business with wine. Aside from potential breakages during customer deliveries, you lose the interaction with customers in the shop.

“Majestic has developed a good reputation for having knowledgeable staff who are happy to make suggestions to customers visiting stores and there are also the sales benefits that come with wine tasting sessions. That type of connection would be lost by going online-only.

“The Naked Wines operation also seems to be spending a significant amount of money trying to attract new customers. In the past financial year it spent £19.1m on ‘new customer investment’ which equates to 9% of the value of the whole company including the Majestic business.

“It believes it will make £4 for every £1 it spends on such investment over a 20-year period. There do not appear to be many barriers to entry for setting up an online wine-ordering business and so competition could be a major issue for the group in the future, affecting its ability to hang on to customers.

“The wording around the sale of the Majestic business also seems a bit worrying. The fact it is flagging contingency plans if it cannot complete the sale during the summer – i.e. have another go in 2020 – would suggest it is far from a done deal.

“And shareholders are likely to be a bit miffed that they will only get the equivalent of the final dividend from the 2018 financial year as a payoff if Majestic is sold, rather than a bumper one-off payment. In fact, they won’t get a final dividend for the 2019 financial year at all if the business isn’t sold.”

These articles are for information purposes only and are not a personal recommendation or advice.