Majestic Wine : Full Year Results

Majestic Wine PLC

('Company' or 'Group')

Full Year Results for the 52 weeks ending 1 April 2019

A Pivotal Moment

· In advanced discussions regarding potential sale of Majestic Retail and Commercial ('Majestic') - expected to be finalised over the summer months

· Group revenue grew +6.3% to £506.1m, accelerating as Naked Wines ('Naked') continues to invest in customer acquisition

· Naked growth plan on track

○ Naked underlying⁽¹⁾⁽⁶⁾ revenue growth rate accelerated to 14.5% (FY18: 11.3%)

○ US now biggest division with sales 21% higher year on year

○ New customer investment⁽⁶⁾ of £19.1m, an increase of £5.0m on last year

○ Repeat customer sales retention⁽⁶⁾ of 81% (FY18: 83%)

○ Repeat customer contribution⁽⁶⁾ increased by £6.0m to £39.8m with margin improved to 26.1% (FY18: 25.2%)

○ Forecast payback on new customer investment on target at 4.0x (FY18: 4.7x)

· Majestic Retail ('Retail') solid in a tough market

○ Underlying revenue growth of 1.5% (FY18: 1.9%)

○ Adjusted EBIT⁽⁶⁾ reducedto £11.3m (FY18: £13.3m) due to gross margin decline

· Group Adjusted PBT(6) of £11.3m lower than FY18 (£17.2m) as a result of the accelerated investment in Naked growth and lower Retail profitability year on year

· Reported loss before tax of £8.5m impacted by £11.1m store impairment charge

· Balance sheet robust: Net Debt of £15.5m, 0.8x Adjusted EBITDA(6 (FY18: £8.4m, 0.35x Adjusted EBITDA) despite high levels of investment in the year and high working capital due to Easter timing and Brexit contingency planning

· Final dividend suspended, to be replaced with a special dividend equal to the final FY18 payment, contingent on completion of Majestic sale

· Board strengthened with US expertise in anticipation of Naked's next phase of growth with proposed appointment of John Walden as Chairman elect and the appointment of Nick Devlin as COO

		FY19	FY18	% YoY	FY19 Underlying (1),(6)	FY18 Underlying (1),(6)	% YoY Underlying (1),(6)
Reported revenue	£m	506.1	476.1	+6.3%	505.1	477.5	5.8%
Adjusted EBIT (2),(6)	£m	12.1	18.2	-33.8%	12.1	18.1	-33.4%
Adjusted PBT (3),(6)	£m	11.3	17.2	-34.5%	11.3	17.1	-34.2%
Adjusted EPS (4)	p	14.7p	23.9p
(Loss)/profit before tax	£m	(8.5)	8.3
Basic EPS	p	(13.3p)	10.9p
Final dividend per share	p	-	5.2p
Free cash flow (5),(6)	£m	1.9	24.9
Net debt (6)	£m	(15.5)	(8.4)

To provide a meaningful comparison with last year, operating performance commentary is stated on an underlying basis (unless otherwise stated). A full reconciliation between our reported numbers and these underlying measures is provided in the financial review.

Rowan Gormley, Group Chief Executive, commented:

'A pivotal moment:

We are at a crossroads in the Company's history. As laid out in March, we have taken the difficult but important decision to focus on Naked and exit from Majestic. As at the date of this announcement, our intention is to sell the business and we are at an advanced stage with multiple bidders. A further update will be provided if and when negotiations conclude at which point we will seek shareholder approval to move ahead. If we are unable to complete the process over the summer, in time for the important Christmas and New Year season, we will continue to run the two businesses independently of each other and look to restart the process in 2020.

It is important to point out that this is a decision we have made from a position of strength.

· The Group grew sales by over 6% despite a tough UK market

· Although underlying profits fell, the biggest cause was a decision to increase investment in new customer acquisition in Naked - which will drive future growth

· And I am delighted to report that our Commercial business, under a new team, has returned to growth after two years of contraction

· Our balance sheet remains strong with leverage of only 0.8x adjusted EBITDA

So why exit Majestic?

Majestic is a great business, with brilliant people and strong customer loyalty. It is also a much better business than it was four years ago with

· Revenue that's 20% higher with online sales up by more than 50%

· Wide scale cost efficiencies implemented to help mitigate FX and inflationary headwinds

· A growing subscription business

· A national fulfilment facility

However Naked has the greater potential for growth, and will deliver the best results for our shareholders, customers, people and suppliers over time. Although we have several options to realise value from Majestic, the cleanest and best for customers, staff and shareholders currently looks to be an outright sale at this time.

Majestic Wine started life with a disruptive model that challenged the status quo. Now is the right time to do it again under the Naked brand.'

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Majestic Wine PLC will host an analyst and investor briefing on Thursday 13 June 2019 at 9am at the offices of Instinctif, 65 Gresham Street, London, EC2V 7NQ. To attend please contact the Investor Relations Team on the details below.

A webcast will be made available after the meeting on our investor website:
https://majesticwineplc.co.uk/investor-centre/results-centre/

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Notes:

(1) Underlying movement (a) includes en primeur revenues in year of order not year of fulfilment, and (b) is calculated using constant FX rates for translation of the comparative period

(2) Adjusted EBIT is operating profit adjusted for amortisation and impairments of acquired intangibles and goodwill, acquisition costs, share based payment charges, impairment to the Retail store estate, restructuring costs, net fair value movement through P&L on financial instruments and adjusting en primeur results to reflect profits on orders rather than on wine fulfilment

(3) Adjusted PBT is defined as Adjusted EBIT less net finance charges

(4) Adjusted EPS is calculated by excluding the effect of the adjusted items described in note (2) above from the (loss) / profit for the period

(5) Free cash flow is defined as cash generated from operations less capital expenditure and excluding cash adjusted items

(6) This is an alternative performance measure. See details at the end of this document

For further information, please contact:

Majestic Wine PLC Rowan Gormley, Chief Executive Officer James Crawford, Chief Financial Officer	Tel: [phone] [e-mail]
Investec (NOMAD & Broker) David Flin / Carlton Nelson /David Anderson	Tel: [phone]
Instinctif Partners (PR Agency) Damian Reece / Guy Scarborough	Tel: [phone] or 07931 598 593

About Majestic Wine PLC:

Majestic Wine PLC is a quality wine specialist, with operations in the UK, USA and Australia.

Our goal is to try to beat the market by investing in customer relationships, rather than stores. We do that through:

· Investing in business models that compound, i.e. that get stronger with growth

· Investing with discipline, because we are able to test new opportunities before we roll them out

· Using data and technology to continuously improve - every quarter we double up on our best performing investments, and cut the worst

Our divisions:

1. Naked - Naked's customers in the UK, USA and Australia crowd fund independent winemakers in exchange for preferential prices on exclusive wines

2. Retail - The UK's largest specialist wine retailer. We help people find wines they will love by employing highly engaged, well trained people equipped with state of the art tools and unique wines

3. Commercial - A specialist on-trade supplier. We help our customers make more money from their wine list by offering national pricing and scale but local delivery and training

4. Lay and Wheeler - A specialist fine wine merchant. We are a trusted guide for people who love fine wine, supplying the world's finest wines with a personal service

Chairman's statement

The future is Naked

Overview

It's an incredibly exciting time as we are about to begin a new chapter in the long history of our Group. The Board has decided that shareholders' interests are best served if we are to focus all of our capital and energies into delivering the long term potential of Naked.

Through many years of dedicated and focused hard work, we are in the enviable position of owning two businesses with the potential to be long term winners.

Since 2015 we've evolved the Majestic Retail estate into a differentiated and scaled customer centric model. In the last three years we've:

· Refocused the business to be customer focused, not store focused

· Driven sales online

· Dramatically improved sales retention

· Successfully launched a subscription business

· Introduced Franchise Lite to address underperforming stores

At the same time we've accelerated investment in Naked and, in doing so, dramatically increased future value. In the last three years we have:

· Almost doubled Naked in size

· Built a loyal and profitable repeat customer base

· Built a 200 strong winemaker portfolio, producing 1,000 wines in 17 countries

· Built robust infrastructure able to deliver market leading service levels

The Board believes that both businesses have good long term potential, but with only finite resources and capital, we are unable to maximise both. It has become clear that we need to focus our energies and capital behind the business with the greater potential for growth and which will in turn deliver the greatest value for shareholders.

After carefully weighing the options, the Board's decision is clear. Of the two businesses, Naked operates in much larger and faster growing markets, it has a disruptive model that will benefit from the consumer shift towards online, and we have first mover advantage and a more defendable competitive position. That is why the Board has taken the decision to focus on Naked and release value from Majestic. We now believe that a sale of Majestic, rather than a merger of both businesses, is the best way to maximise value for our shareholders.

As always, the Board has shareholders' best interests in mind when considering these options and the decision to focus on Naked was not one taken lightly. The criteria that any plan has to meet in order to get Board support remains as we stated in April 2018 and is equally applicable to the Naked growth plan as ever:

1. We need to be sure that we can maintain our targeted returns on investment in growing the base of customers

2. We must be able to identify clear milestones to allow us to course correct if returns deteriorate

3. We invest in a control environment commensurate with the investment plans

Whilst we remain in the process of completing the realisation of value from Majestic we have suspended the dividend. If a sale of Majestic completes we will pay a special dividend in place of the final.

Performance

FY19 was a year of further progress in which we continued to make underlying improvements in the Majestic businesses while investing for growth in Naked.

Reported revenue of £506.1m was up 6.3% in the year (FY18:2.3%). We reported a loss before tax of £8.5m, a significant reduction from the £8.3m profit before tax delivered in FY18, reflecting the investment in growth in Naked, weaker Retail trading and a non-cash impairment charge relating to the Retail store estate of £11.1m. Adjusted PBT was £11.3m (FY18: £17.2m).

Naked Wines continues to deliver reliable growth and future value generation with underlying sales growth of 14.5% in the year (FY18: 11.3%). We delivered strong growth in each of the Naked markets but we're particularly pleased with the 21% sales growth in the US, proving that our accelerated investment in customer acquisition is effective.

Majestic Retail has delivered a solid performance in a challenging environment, with underlying sales growth of 1.5% (FY18: 1.9%). The improvements and growth initiatives we've implemented are showing signs of success. Customised and targeted marketing is delivering year on year customer growth, a large and growing proportion of sales are now placed online, and we've built on the successful launch of our subscription business, Concierge, which is a source of dependable and recurring revenue. However gross margins were again lower year on year and this drove a reduction in profitability for the business.

Majestic Commercial returned to growth with sales up 1.8% (FY18: (5.6%)) and improved profitability. The new leadership, restructured operations and improved processes have delivered higher sales to new customers and improved retention.

Lay & Wheeler is once again contributing to growth with reported sales up 22.7% (FY18: (1.1%) and significantly improved profitability.

Board changes

Katrina Cliffe was appointed to the Board as an Independent Non-Executive Director on 20 May 2019. Katrina adds a wealth of experience and a complementary skill set through her other Board positions and previous management experience across the financial and retail sectors.

Alongside these results we are announcing two further changes to the Board, which will balance the composition towards the US market, our biggest growth opportunity.

Firstly, Nick Devlin, President of the US Naked Wines business will join the board in the new position of Group COO. Nick has done tremendous work with the US business in the last two years, driving our ambitious growth agenda in a structured and efficient way, and we look forward to him having the same impact on the rest of the Group.

Secondly, due to other commitments I will be stepping down as Chairman at the AGM in August and leaving the Board six months later after a period of transition. Taking my place is John Walden, who brings a wealth of retail experience across both online and face to face channels, as well as significant US experience to guide our continued growth into that market.

I am delighted to welcome Katrina, Nick and John to the Board.

Outlook

The Board is confident that we are well on track to create a group focused on Naked Wines with a process to sell Majestic well advanced. We are also confident that continued investment in customer acquisition by Naked will create sustainable future value. As a result we are on a path to becoming a single brand business with the potential to mature with substantial profitability.

Chief Executive Review

Going for growth

Dear shareholders, suppliers and staff,

The short story

This is a momentous time in your company's history. We have taken the difficult, but strategically important decision, to focus your company on Naked Wines. At the time of writing, having tested two routes to achieve this over the past three months it is looking likely that we will be selling all of Majestic Retail and Commercial, and through a separate transaction, Lay and Wheeler.

So, for this report, I will focus on this decision, and what it means to you as shareholders, before I report on the 2019 financial year.

Why are we doing this?

We have had a difficult decision to make. We have two great companies, Naked and Majestic. Both of them have the potential for growth - and we only have the resources to do one well. If we tried to back both to be long term growth engines we risk delivering neither.

In the end we chose Naked because

- It is established in the big and fast growing US market

- It is a digital business

- It is differentiated and defendable

What happens next?

If we are successful in selling Majestic in the coming months then

● We will remain a quoted company

● The name will be changed to 'Naked Wines PLC', subject to shareholder approval

● The sale proceeds will be used to

○ Pay off our debt

○ Accelerate growth in Naked Wines

○ And we intend to return any surplus to shareholders

● We will be one company, with one brand and a single focus

If we don't complete a sale over summer, we intend to continue to run Majestic independently through the important Christmas and New Year season before restarting the process in 2020.

A deeply heartfelt thank you

I want to thank from the bottom of my heart, the wonderful people of Majestic Wines, who have done an amazing job of delighting our customers, at the same time as we have implemented radical changes, all with great cheerfulness and engagement. You are a wonderful group of people and have faced into the uncertainty of the past few months with the dedication and commitment that has made the last four years a pleasure.

Update on 2019 financial year

As a Group we delivered another year of strong progress. Group revenue of £506.1m was up 6.3% on last year and comfortably surpassed our target of £500m. Both overall revenues and repeat customer contribution at Naked continued to show strong growth as we increased investment to build a base of loyal and profitable customers. In a relatively resilient performance against a challenging backdrop, Retail grew revenue 1.5% but suffered reduced profitability.

	Underlying
	Revenue £m	% YoY	Adj. EBIT £m	% YoY
Naked Wines	178.4	14.5	6.7	(22.4)
Majestic Retail	267.7	1.5	11.3	(15.1)
Majestic Commercial	44.1	1.8	2.5	3.2
Lay & Wheeler	14.9	2.4	1.2	22.8

Key drivers of performance in 2019

1. Naked generated £6.0m more contribution from its repeat customers, who we call Angels. Our investment in new customer acquisition is proving to be effective as we are finding more customers and better customers who spend more with us each year

2. We increased our new customer investment by £5.0m to £19.1m to drive future growth. Naked is a subscription business so we have to continually acquire new customers to drive growth. On average our investments are generating pay back of 4x so it's a great place to deploy capital

3. We delivered 1.5% sales growth in Retail but this translated into a gross profit that was lower by £2.0m as we maintained competitive pricing and used tactical discounts to both retain existing and acquire new customers

4. Our fixed costs investment in Naked and central items increased by £5.4m year on year

As a result, our Group adjusted EBIT (on an underlying basis) reduced by £6.0m year on year to £12.1m.

In addition, we have recognised a non-cash charge of £11.1m reflecting impairment of the Retail store estate due to the weaker profitability of the business and a further £1.0m of cash restructuring charges as we have started to reduce the capacity in our store estate.

Combining this with the £7.7m of other adjusting items (FY18: £8.9m) and £0.8m of finance expenses has resulted in the Group reporting a statutory pre-tax loss of £8.5m for the financial year (FY18: £8.3m profit).

Operational performance as measured in the following KPIs remains strong.

	Naked Wines	Retail	Commercial	L&W
Product availability	FY19: 91% FY18: 90%	FY19: 86% FY18: 86%	FY19: 90% FY18: 90%	FY19: n/a FY18: n/a
Team retention	FY19: 91% FY18: 94%	FY19: 80% FY18: 81%	FY19: 69% FY18: 71%	FY19: 100% FY18: 100%
Wine quality (buy it again)	FY19: 91% FY18: 91%	FY19: 92% FY18: 89%	FY19: n/a FY18: n/a	FY19: n/a FY18: n/a
Proportion of 5-star service ratings	FY19: 90% FY18: 90%	FY19: 86%* FY18: 89%	FY19: n/a FY18: n/a	FY19: n/a FY18: n/a

* Now includes web orders. Excluding these for comparison to FY18 this was 90%

Naked firmly on track

In our ten year history, Naked has delivered remarkable and sustained growth. We've continued to grow in our most mature market - the UK; we've entered, disrupted and grown rapidly in the US, and we are leveraging our experience and marketing techniques in Australia.

In that time, the business has consistently delivered very healthy underlying trends. We've generated attractive returns on our investments in building a loyal and profitable base of repeat customers.

We've done that in the following ways:

1. We've successfully built a customer acquisition machine

Over ten years we have developed and refined the best ways to tell new customers about our business. As a result we have been able to increase our investment in customer acquisition by more than 20% a year for the last five years, up to £19.1m in FY19.

2. Our investments have proven to be effective

We are gaining loyal and profitable customers and we are not paying too much to find them. Our payback, measured as the 20 year return on each £1 spent on customer acquisition, is forecast to be 4x, the target we have set ourselves over the midterm. We're achieving this through our test and learn approach to optimise returns over time through continuous measurement and refinement of our activities. One of the best examples of that is that we are now spending less on promotional discounting and more on targeted marketing, which we've found is a better way to sign up high quality customers.

3. Our product and service is getting better all the time

The best way to ensure we keep our customers is to make them happy. We give our Angels exactly what they want - great wines at affordable prices and all backed up with industry leading service. Our customers rate 91% of our wine sales as something they would buy again and give 90% of our customer service interactions a 5* satisfaction rating.

We've made further great progress on this front this year:

● We've continued to grow the number of excellent winemakers we work with

● Our wines are great value and great quality - we have the awards to prove it

● Operational capability is better than ever (and better than most!). This year, we've built out our distribution capability with the addition of a fourth distribution centre in the US so we now cover the breadth of the country and can deliver to the vast majority of Angels within 48 hours

Retail & Commercial resilient

The Retail operations delivered a resilient top line performance achieving 1.5% sales growth amidst weak consumer confidence and political and economic uncertainty. Growth in online sales together with our subscription business, Concierge, offset the impact of having no Easter - a peak period - in this financial year.

However, the top line growth came at the expense of profitability as continued competitive intensity and aggressive pricing put pressure on gross margins. Operating efficiency gains and continued cost control helped to offset increased distribution costs and inflationary headwinds, however the net result was lower adjusted EBIT year on year.

Commercial returned to growth after an extended period of decline. With a new team and refined processes in place, the business delivered both top line growth of 1.8% (FY18: 5.6% decline) and EBIT improvement of 3.2% year on year.

Both Retail and Commercial sales take place through our stores. Having reassessed the portfolio against current trading patterns we have taken a charge for impairment of our store estate of £11.1m. (FY18: £0.4m)

Lay & Wheeler delivered reported revenue growth of 22.7% due to high levels of en primeur shipments. Underlying revenue was 2.4% higher year on year and EBIT growth of 22.8% was achieved through a combination of margin improvement and cost control.

The future is Naked

An investment machine

In the very near future we intend to have one business model, operating under one brand which is well funded and a clear focus on growth. With renewed focus on a single goal we have reappraised the Naked opportunity and have decided that now is the time to put more fuel in the engine.

What gives us the confidence to do that? The short answer is that the economics of a subscription business with loyal customers who behave predictably give us long term contribution growth in exchange for upfront investment.

If we continue to invest at the current rate, maintain current retention levels and achieve the targeted payback, the future repeat contribution will continue to scale. That's if we maintain the current rate of investment. We think we can go faster.

As growth investment drives future contribution, we want to increase the rate of investment to maximise future value. We believe we have the model, the experience and the opportunity to accelerate investment, at our targeted payback, and in doing so dramatically increase future contribution and value.

Summary

Our future is Naked. Strategically we intend to exit Majestic, with promising progress being made to achieve this over the summer. We will then be starting a new chapter in our Group's history. We'll operate a much simpler business with one brand and one business model. We're well-resourced, have a clear focus on growth, and we believe we can accelerate investment to build a bigger, more profitable business in the longer term.

Chief Financial Officer's Investment Review

After pausing for breath in 2018 to focus on greater productivity, I'm pleased to say that in 2019 we've been able to accelerate our investments for growth across multiple areas of our business.

Investing for future growth

Naked Wines new business

We increased our investment in new customer acquisition for Naked Wines to £19.1m in line with our strategy announced in April 2018. This drove an increase in sales to new customers of 18%. Overall forecast payback achieved was 4.0x in line with our target.

Within this spend we have already identified certain business partnership activities which deliver low returns which we will stop running if they cannot be repriced to acceptable levels.

This investment is so critical that we report a set of KPIs relating to it as follows:

		FY19	FY18
Sales to new customers	£m	25.5	21.6
Investment in new customers (= new customer contribution)	£m	(19.1)	(14.1)
New to repeat customer sales conversion	%	183%	168%
Repeat customer sales	£m	152.9	134.3
Repeat customer contribution	£m	39.8	33.8
Repeat customer sales retention	%	81%	83%
Forecast payback	Ratio	4.0x	4.7x

Action and implication

In FY20 we have a target to grow our new customer investment level by a further c. £7.0m whilst maintaining payback discipline. To achieve this we have:

● Added resource, in particular in the US, to identify bigger strategic partnership opportunities

● Developed new tools to track partner distributed marketing materials to assess partner operational effectiveness and identify optimisation opportunities

● Implemented a number of changes to our customer on boarding journey to eliminate discounts driving immediate enhancements in LTV and payback

Digital Marketing

A growing portion of our new customer investment is deployed digitally. We grew our digital new customer acquisition investment in Naked Wines to £3.5m (FY18: £1.6m). As we analyse these customers we see that they are our highest value customers, testament to the targeting algorithms that digital marketing is supported by. As a result we have continued to increase the scale of the digital marketing resources.

Action and implication

In FY20 we are forecasting that we will step up our digital investment in Naked Wines to £4-5m. We will also commit about 10% of this to test and learn, to explore new digital channels and executions.

Retail Subscriptions

We now have almost 35,000 customers subscribed to our 'Concierge' proposition and it continues to deliver customers with a higher annual spend and improved retention, driving a 48% uplift in their profitability and an early indication that forecast payback is c.10x on the cost of acquiring them.

During the year we launched new features to the service

● Premium: A more premium and profitable range of wines

● Double up: The ability to quickly reorder the same case

● Lock It In: A regular case of your favourite wine with our best price guaranteed

About 6% of our subscribers are now signed up to our premium proposition and this figure is growing each month. This premium option has the added benefit of a 44% higher contribution than standard customers as picking, packing and shipping costs remain the same. Early data on customers who 'Lock It In' are showing 26% uplifts in spending, with the benefit being through more non-subscription spending as much as the subscription.

Action and implication

It is clear that there is appetite for a subscription service from Majestic customers and that adding subscription to the Majestic proposition enhances customer LTVs. Furthermore, early in FY20 we tested migration to Naked subscriptions with Majestic customers and those results give us confidence that we could execute that strategy should we wish to.

Retail Partnerships

Retail partnerships, where we advertise our business to other company's customers, have been successful in acquiring new customers into the business. This year we invested £0.9m driving nearly 100,000 incremental customer visits to store. However the data shows us that these customers, on average, tend to be materially lower value than unprompted customers as they have lower tendency to repeat shop and therefore spend considerably less as repeat customers. While our models of customer value suggest payback of 3.9x from this activity, because of the weaker spending behaviour we are not yet fully confident in the long term value forecast for these customers so will only repeat activities where customers are delivered at minimal cost and therefore deliver very fast payback.

Action and implication:

We will continue to drive traffic through selected partnerships, however we will ensure that we are only doing so when the incremental footfall is not disruptive to the core store operation e.g. avoiding the Christmas peak period.

Retail promotional plans

Our range is now 57% exclusive products and own label and we want to continue to grow this as we are able to offer customers superior value when we manage the full supply chain while achieving better margins ourselves - a profitable win-win! Over the last year we invested £0.4m of gross margin in short term price support to drive adoption of our exclusive products growing participation significantly year on year. Early signs on the top five lines that we have the most data on indicate a net benefit of c. £0.2m per year, indicating a two year payback on the investment in developing these products

Action and implication

We intend to continue to drive switching to own label and Majestic exclusives, ensuring that as we achieve greater scale we also realise cost savings through the supply chain.

Lay & Wheeler Fine Wine Discovery Club

We have been trialling the FWDC for c. 2 years now. In FY18 we slowed the rate of investment pending review of the long term customer performance. Having done this we believe that payback on the investment to date may be considerably higher than originally expected due to better long term customer retention, higher rates of additional purchasing and conversion to our Cellar Circle product which tends to drive higher spending levels and engagement.

Action and implication:

With confidence in the longer term customer value we will start to test higher levels of investment, not only in FWDC but also directly into Cellar Circle.

Online 'product management' team

We spent in excess of £0.5m on a team tasked with rigorously optimising our web properties element by element. They have generated some significant improvements in our customer conversion funnel and basket completion rates, as well as trialling some innovative features with less success. Such is the nature of test and learn!

Action and implication:

The team will continue their work focused on a large testing plan around the different elements of the Naked Wines proposition.

Controls / Compliance

We have invested in control and compliance in a number of areas; most notably the US where we have ambition to be materially bigger. As such we have built out a dedicated regulatory compliance team as well as adding resource across finance and analytics. We also added resource into our Plc team to support the ever-changing regulatory landscape, with big projects this year including development of our sustainability policy and preparation for IFRS16. Within the retail business we spent £2.0m replacing our EPOS system to ensure compliance with latest security standards, as well as having a platform to further build our customer experience on.

Action and implication

We will continue to invest to ensure we have the right processes and controls to manage the increasing scale of our business units, especially in the US where we operate in a complex regulatory environment.

Driving productivity:

Store operations: van fleet

Action taken:

Using the data from our telematics implementation in FY18 we have investigated ways to consolidate our van network without impacting our customer experience. We have modelled what an alternate van network could look like which maximises van utilisation and reduces the cost per drop significantly.

Action and implication

With the concept proved to be a source of significant savings we are now finalising the execution plan for this initiative.

Store operations: staff

Action taken:

We continue to invest in our store estate to improve both our customer experience and store productivity. This year we refurbished and fully shelved 74 stores, part shelved all others and have begun to 'winefy' the estate - an initiative designed to engage the customer in their wine flavour profile and help them navigate the world of wine more effectively. Shelving and revised labour modelling has resulted in labour costs held flat in the face of increased transaction volumes and inflationary pressure due to reduced merchandising effort. The early data from our 'winefy' experience suggests that customers who build a profile are showing 10-20% higher values, albeit we need to see how this develops over an extended period.

Action and implication

We will continue to roll out shelving across the estate, aiming to install it in an additional 20 stores by half year, to drive efficiency in the staffing model.

Financial Review

1. Group Overview

	Reported £m	Adjusted items £m	Adjusted £m	Impact of FX £m	Underlying £m
Year ended 1 April 2019
Revenue	506.1	(1.0)	505.1	-	505.1
EBIT	(7.7)	19.8	12.1	-	12.1
PBT	(8.5)	19.8	11.3	-	11.3
Year ended 2 April 2018
Revenue	476.1	1.6	477.7	(0.2)	477.5
EBIT	9.3	8.9	18.2	(0.1)	18.1
PBT	8.3	8.9	17.2	(0.1)	17.1

Group Overview

The Group grew reported revenue by 6.3% to £506.1m delivering on the target to achieve Group sales of at least £500m that we set in 2015 at the start of the transformation plan. On an underlying basis we delivered an increase of 5.8% to £505.1m. Underlying revenue growth has accelerated vs the 4.0% rate seen in FY18 as we increased Naked Wines investment in customer acquisition, growing underlying sales by +14.5% in this division (FY18: +11.3%)

The Group generated a statutory loss before tax of £8.5m, a significant reduction from the £8.3m profit reported in FY18.

On an adjusted underlying basis our profit before tax of £11.3m reflected a 34% underlying reduction vs. FY18.

The main drivers of our reduced profitability are:

Adjusted EBIT:

● Retail adjusted EBIT reducing by £2.0m as gross margin pressure outweighed the sales growth we achieved, and our focus on costs which maintained a flat cost base despite significant inflationary pressures

● Naked Wines adjusted EBIT (on an underlying basis) £1.9m lower year on year, the net of:

○ £5.0m increase in the level of investment to acquire new customers.

○ Contribution from repeat customers increasing by £6.0m as a result of the investment in prior years in customer acquisition

○ Fixed costs increasing by £2.9m

● Our central cost base increasing by £2.4m as we invested in control and compliance resource across staff costs, IT systems and legal and professional support.

Statutory loss before tax:

● £11.1m impairment to the Retail store estate. This non-cash write-off of assets is based on our expected cash flows from each store in future, compared to the carrying value of the store. We have reduced the expectation of future cash flows based on the weaker profit margins we are experiencing in Retail and by reflecting that our stores are no longer necessary to fulfil our online orders due to our centralised fulfilment arrangements.

Taxation

Despite the reduction in statutory profit in the current year our income statement tax charge has remained level at £0.9m (FY18: £0.9m). The negative statutory effective tax rate of -10.7% is principally the result of the impact of the £11.1m impairment of fixed assets charge in the UK Retail business which is not a deductible expense. It is also affected by the increased profitability and effect of prior year tax charges in our overseas trading businesses. The adjusted effective tax rate⁽⁶⁾ this year of 17.3% (FY18 12.1%) does not benefit from a number of one off credits which reduced the rate in FY18.

(Loss)/earnings per share

As a result of the reduction in profitability our statutory loss per share has reduced to -13.3p. Under the guidance set out in IAS 33, Earnings per share, no diluted loss per share is reported. On an adjusted basis earnings per share have declined from 23.9p to 14.7p due to the decline in adjusted profit after tax and the increase in the weighted average number of shares in issue.

Cash flow and Net debt

Our net debt increased by £7.1m year on year to £15.5m. The major drivers of this were an increase in net working capital and an increase in capex largely absorbing adjusted EBITDA with dividend, tax and interest outflows totalling £7.7m.

Our working capital increased by £10.6m, a combination of:

● Investment in inventory at Naked Wines, in particular the US to support our continued future growth. We grew stock levels by £9.1m, offset by £2.7m of additional customer funds

● Higher stock levels in the UK due to the later timing of Easter year on year and to allow us to carry additional stock of c. £8m as mitigation to supply disruption in the event of a disorderly Brexit, which largely unwound in the first periods of FY20;

● We estimate a normalised year end working capital position would have been c. £8m lower

We also incurred

● Higher capital expenditure this year of £7.0m (FY18: £3.8m) as we replaced the EPOS system in the Retail estate and rolled out shelving to more stores, whilst continuing to invest in our new accounting system

● Tax and interest payments of £2.7m

● Payment of dividends totalling £5.2m

The closing net-debt balance represents 0.8x adjusted EBITDA (FY18: 0.3x) which remains well within our covenant leverage limits.

Dividend

In March we announced that the final dividend for the year would be reviewed in light of our decision to focus on Naked Wines and to exit from Majestic. As the exit process is still ongoing, the Board has taken the decision to suspend the dividend. Should a sale of the Majestic business take place, the Board intends to pay a special dividend to the level of the FY18 final dividend (5.2p).

Guidance

Our near-term outlook is highly dependent on the potential sale of the Majestic business and we expect to give an update over the summer months. We anticipate focusing the Group on increasing levels of investment in new customers in Naked Wines. We believe that we can increase this investment by a further £7m in FY20 while maintaining our 4x payback. We would also expect similar levels of new to repeat customer sales conversion and repeat sales retention as previous years.

Our fixed cost base across Naked and the central costs totalled £23.6m in FY19. We expect these will show an underlying increase in the order of 10-15%. Should we sell Majestic we would expect to eliminate £1-1.5m p.a. of our central cost base, reflecting our desire to refocus the central team fully onto the significant growth opportunity the business represents.

2. Business Unit Highlights

Naked Wines

Year ended 1 April 2019

	£m	Impact of FX £m	Underlying £m	Analysed as 'New' £m	Analysed as Repeat' £m
Revenue	178.4	-	178.4	25.5	152.9
Contribution	20.7	-	20.7	(19.1)	39.8
Adjusted EBIT	6.7	-	6.7	n/a	n/a

Year ended 2 April 2018

	£m	Impact of FX £m	Underlying £m	Analysed as 'New' £m	Analysed as 'Repeat' £m
Revenue	156.1	(0.2)	155.9	21.6	134.3
Contribution	19.8	(0.1)	19.7	(14.1)	33.8
Adjusted EBIT	8.7	(0.1)	8.6	n/a	n/a

We increased investment in new customers by £5.0m to £19.1m (FY18: £14.1m) supporting growth in revenue to new customers of +18.0%.

Our sustained investments in new customers translated to repeat customer revenue growth of +13.9%. This growth, plus the improvement in repeat customer contribution margin to 26.1% (FY18: 25.2%) brought FY19 repeat customer contribution to £39.8m, £6.0m higher than FY18.

Combining £5.0m higher new customer investment, £6.0m higher repeat contribution and £2.9m higher fixed costs, adjusted EBIT decreased by £1.9m in the year to £6.7m (FY18: £8.6m)

We focus on two critical measures of performance for Naked Wines:

1. Repeat customer sales retention: In FY19 this was 81%, marginally lower than in FY18 (83%). This was impacted in H1 (78%) in particular by the timing of Easter this year, but recovered well in H2 (83%) giving us confidence that loyalty remains high.

2. Forecast payback on investment in new customers: In FY19 this was 4.0x compared to 4.7x for the investments made in FY18. This is in line with our targeted payback based on our growing investment. The reduction year on year reflects our willingness to invest more aggressively while remaining disciplined about returns.

Because we get more data about the Angels we have acquired over time, we can also refine our expectations on payback of older cohorts of Angels. The following table shows how our payback assessment is changing over time for the Angels acquired in each financial year. As you can see, recent history has shown payback expectations in line with the initial estimates.

		Payback measurement in
		Year 1	Year 2	Year 3
Investment Year	FY17	4.5	4.9	4.5
	FY18	4.7	4.6
	FY19	4.0

Majestic Retail

Year ended 1 April 2019

	£m	Impact of FX £m	Underlying £m	Analysed as 'New' £m	Analysed as Repeat' £m
Revenue	267.7	-	267.7	53.5	214.2
Contribution	21.7	-	21.7	2.2	19.5
Adjusted EBIT	11.3	-	11.3	n/a	n/a

Year ended 2 April 2018

	£m	Impact of FX £m	Underlying £m	Analysed as 'New' £m	Analysed as Repeat' £m
Revenue	263.8	-	263.8	55.9	207.9
Contribution	24.6	-	24.6	4.5	20.1
Adjusted EBIT	13.3	-	13.3	n/a	n/a

Revenue increased 1.5% vs FY18 driven by our repeat customer base (+3%). New customer sales declined by 4.3% as we sourced more new customers year on year but with the mix moving towards discounted partnership activity. Overall, this is a resilient sales performance in a flat market which had no Easter falling in the financial year. Gross margin fell to 21.8% (FY18: 22.9%) resulting in gross profit being £2.0m lower year on year. The gross margin reduction is a combination of mix shift into lower margin products, and heavier discounts where we have driven footfall to grow the customer base. Our distribution costs, predominantly store operating costs and fulfilment costs, increased by £0.9m (2.8%) reflecting the continued shift of business online and towards national fulfilment, including third parties. Continued focus on admin cost control resulted in a £0.8m reduction year on year. As a result of these movements adjusted EBIT for the Retail division declined by £2.0m year on year to £11.3m (FY18: £13.3m).

Majestic Commercial

Year ended 1 April 2019

	Reported £m	Underlying £m
Revenue	44.1	44.1
Adjusted EBIT	2.5	2.5

Year ended 2 April 2018

	Reported £m	Underlying £m
Revenue	43.4	43.4
Adjusted EBIT	2.4	2.4

The performance of Commercial improved in the year with sales returning to growth of +1.8% (FY18: 5.6% decline) while growing gross margins by +0.3% points resulting in gross profit of £7.9m (FY18: £7.7m). With operating costs growing at 3.5% the gross profit growth led to adjusted EBIT 3.2% higher year on year at £2.5m (FY18: £2.4m).

The improved performance has come as a result of two key changes:

● In the first half, the team reworked their approach to securing new accounts resulting in higher levels of sales to new customers, offsetting the continuing high levels of account losses being seen due a mix of competitive activity and business failures

● In the second half, the team then improved their processes around management of existing accounts and improved repeat customer retention. As a result H2 sales growth was an impressive +5% vs. FY18.

Lay & Wheeler

Year ended 1 April 2019

	Reported £m	En Primeur £m	Underlying £m
Revenue	15.9	(1.0)	14.9
Adjusted EBIT	1.2	-	1.2

Year ended 2 April 2018

	Reported £m	En Primeur £m	Underlying £m
Revenue	12.9	1.6	14.5
Adjusted EBIT	0.9	-	0.9

Lay & Wheeler reported revenue was 22.7% higher year on year, driven by high levels of en primeur shipments. Underlying revenue, that recognises en primeur at time of order rather than dispatch, was 2.4% higher year on year. This resulted in adjusted EBIT growth of +22.8% through a combination of gross margin improvement through mix movements and managing to a flat cost base.

Central Costs

Central costs grew from £7.2m in FY18 to £9.6m this year, as a result of the planned investments into resources supporting growth (digital marketing, online product management, business intelligence) and controls and compliance (finance, legal).