Majestic Wine Plc has been selected for the purpose of analysis in this assignment. The Annual Reports for the year ended 2007 and 2008 have been taken as reference for this study. For comparison of the financial ratios with a company having similar operations, Berry Brothers and Rudd Limited, hereafter referred as BBR Ltd. has been chosen. Berry Bros. & Rudd is Britain's oldest wine and spirit merchant, having been in business for over 300 years.
1.2 About the Company - Majestic Wine Warehouses
Majestic Wine Plc (hereafter referred as Majestic) is the UK's leading wine warehouse chain selling wine by the mixed case to the general public. Majestic has over 115 stores throughout England, Scotland and Wales and plans to open many more in the future. They also own Wine and Beer World in Northern France. Majestic's annual turnover was ÃÂ£197 million in the financial year ended March 2008.
Majestic has unique trading policy that means that wine is sold by the mixed case rather than by the bottle. Their stores occupy large sites that can house vast quantities of stock - most stores have at least 800 different wines available at any one time. The emphasis in the stores is on providing exceptional and award-winning levels of customer service with the help of highly trained and enthusiastic staff. With free delivery, free glass loan, friendly, knowledgeable staff and a tasting counter in every store, customers are encouraged to browse and taste before making their purchases.
With this brief background of the company the financial ratios of Majestic shall be analysed with inputs from the Annual Reports.
1.3 Profitability analysis
Sales Revenue (ÃÂ£m)
Cost of Sales (ÃÂ£m)
Gross Profit (ÃÂ£m)
Operating Profit (ÃÂ£m)
Net Profit after taxes (ÃÂ£m)
Capital Employed (ÃÂ£m)
Total Assets (ÃÂ£m)
Gross Profit margin
Net Profit margin
Operating Profit margin
Return on Capital Employed
Return on Stockholder's Equity
Return on Total Assets
The company has posted a minor sales growth of 3.0% in 2008 over 2007 whereas it grew over 11% on 2007 over the last year. The operating profits have also grown at the same rate at 3% over the previous year. The gross profits margin has gone up fractionally but the operating profit margin has stayed the same at 8.2% in 2008.
Majestic has also realised higher revenue per bottle of still wine which has increased from ÃÂ£5.75 in 2007 to ÃÂ£5.98 in 2008, an increase of 3%. Perhaps this is the reason that revenues have gone up in 2008. However, the increased prices have not helped in improving net profit margins which remained the same at 5.7% in 2008.
The Return on Capital Employed has increased from 29.9% to 31.9% due to a decrease in the investments by ÃÂ£1.9m. This indicates that the company has been able to effectively utilise its increased investments in on store refits & upgrades and store infrastructure. This is better than 9% posted by its competitor BBR Ltd. The Return on Stockholder's Equity has improved marginally from 30.8% in 2007 to 32.3% in 2008 but Return on Total Assets has fallen from 17.81% to 16.7% in 2008. However these figures are much better than those of BBR Ltd which indicates a good revenue performance compared to its competitor.
Overall the company has shown a stable profitability performance in 2008.
1.4 Liquidity analysis
Current Assets (ÃÂ£m)
Current Liabilities (ÃÂ£m)
Current ratio, which should ideally be at 1.5, is at a low 1.0 in 2008 which means that the company is operating on a tight liquidity environment. The current assets will just about cover the current liabilities, which is not a very good situation. BBR Ltd is operating at a very good level of 1.9.
Quick ratio has also worsened to 0.20 from 0.30 last year. This is a low figure indicating that the company does not have sufficient liquid assets which can be disposed off at a short notice to pay off the liabilities in case the need for it arises. Contrastingly, BBR Ltd has a very comfortable Quick ratio of 1.7.
1.5 Efficiency analysis
Sales Revenue (ÃÂ£m)
Cost of Sales (ÃÂ£m)
Total Assets (ÃÂ£m)
Debtors (Trade) (ÃÂ£m)
Creditors (Trade) (ÃÂ£m)
Sales to Assets
Stock turnover (days)
Debt turnover (days)
Credit turnover (days)
Working Capital Cycle (days)
The company has not provided the figures for Purchases for the year which is normally used to calculate the credit turnover days. We shall assume that the Purchases are equal to Cost of Goods Sold plus changes in inventory.
Sales to Assets ratio has declined marginally from 2.18 to 2.03 in 2008, i.e. by 6%. The Sales growth of 3% is lower than Assets growth of 11% indicating that the company has not been able to productively utilise its assets to increase sales. However, this is still better than the competitor's figure of 1.14.
The Stock turnover has increased by 7 days to 81 days due to an increase in stock by ÃÂ£4.3m while the cost of sales has gone up by only 3%. Debtors turnover has remained same at 13 days. The Credit turnover has increased by 13 days from 81 to 94 days because even though the purchases have increased by 3% the creditors have increased by 22%. The overall Working Capital Cycle is a very impressive at 0 days, which has, reduced over last year's level by 6 days. This is a typical characteristic of the retailing business where the debtor turnover is much less than the creditor turnover as the industry operates mostly on cash basis. The customers pay up at the time of purchase but the company can pay its suppliers at a later date. However the stock turnover is a high figure of 81 days which although lower than the figure of BBR Ltd. still needs to be brought to a lower level. The company is enjoying a comfortable operating cycle because of the high creditor turnover but this is not good for the suppliers whose money is blocked with the company for more than the acceptable 30 days. This should give a clue to the management of Majestic to better its supply chain operation and control its stocks efficiently and improve payment to suppliers.
1.6 Capital Structure analysis
Total Debt (ÃÂ£m)
Total Assets (ÃÂ£m)
Shareholder's Equity (ÃÂ£m)
Net Profit before interest and taxes (ÃÂ£m)
Net Profit before taxes (ÃÂ£m)
Debt to Asset ratio
Debt Equity ratio
Debt to Asset ratio is stable at around 0.5, which indicates that there is sufficient fixed asset coverage for the long-term debt and some more scope to raise debt to finance investments for future growth. This brings the company to a very strong financial position. BBR also has a low D-E ratio of 0.09, which indicates that it is also on a strong financial position.
Interest cover is very good at 265 times in 2008, which has reduced from last year's extremely high figure of 15685 times. This was due to a very low interest on loans. The good interest coverage ratio is another indication of low debt.
Overall the Capital structure of the company is strong with further scope to raise debt for future financing.
1.7 Shareholder Return Ratios analysis
Shareholder Return Ratios
No. of equity shares (m)
Share price (02Oct, 06) pence
Share price (01Oct, 07) pence
Share price (24Sep, 08) pence
Dividend per share (pence)
Total Shareholder Return
Earnings Per Share (pence)
Market to Book Value
The Total Shareholder Return (TSR) is very poor at -42% in 2008 and has fallen substantially over last year's modest 11%. This decline in shareholder value has been brought about by the big fall in the share price from 335.75p to 188.25p. Majestic's Earnings Per Share has also shown some gains from 16.6p to 17.7p due to a share buy-back program.
Market to book value has ratio has fallen from 4.78 in 2007 to 2.21 in 2008. This indicates the shareholders perceive a higher value for the company than what it is worth for in the books though this is rapidly declining due to the fall in share price.
Dividend yield in the year 2008 is very meager at 2.3%, which is lower than last year's level. The company has decided to plough back its profits into investment to improve operations and sustain competitive advantage for the future.
In this analysis we do not have comparable figures for BBR Ltd as its shares are not traded on the London Stock Exchange. However, just by looking at Majestic's stock performance we can conclude that the shareholder's don't perceive a strong future for the company and this is indicated by the falling share prices.
1.8 Cash Flow analysis
Cash Flows from Operating Activities. (Figures in ÃÂ£ '000)
Profit for the year
Income tax expense
Net finance revenue
Amortisation and depreciation
Profit on disposal of non current assets
Increase in inventories
(Increase)/decrease in trade and other receivables
Increase/(decrease) in trade and other payables
Increase/(decrease) in deferred lease inducements
Change in fair value of derivative instruments
(Decrease)/increase in provisions
Share based payments
Income tax paid
Net Cash Generated by Operating Activities
Cash Flows from Investing Activities (Figures in ÃÂ£ '000)
UK Income tax paid
Overseas income tax paid
Purchase of Non Current Assets
Receipts from sales of Non current assets
Receipts from sales of non current assets held for sale
Net Cash (Utilized)/ Generated from Investing activities
Cash Flows from Financing Activities (Figures in ÃÂ£ '000)
Issue of Ordinary Share Capital
Receipt of exercise of share options satisfied by QUEST
Receipts for shares issued to ESOT
Equity dividends paid
Net cash from Financing Activities
Summary of cash flow (Figures in ÃÂ£ '000)
Cash Flow from
Net cash flow
The net cash flow generated by Majestic at the end of the last three years shows a declining trend. The cash flow in 2008 is negative. However, this should not be a cause for concern as the cash flow from operating activities is steadily increasing and almost doubled from ÃÂ£9.1m in 2006 to ÃÂ£18.0m in 2008. The major reason for cash outflow is through investment activities such as opening new stores and through financing activities such as the recent share buy-back program. The cash flow analysis shows that the company has financially strong operations and the cash outflow is towards investments which will result into future cash flows after two to three years.
1.9 Like for like store sales
The increase of sales in like for like UK retail stores has dropped from 4.9% in 2007 to 2.4% in 2008. This can be explained by the increase in the average price of wine by 3% in 2008. If the effect of the price increase is excluded, this will mean that there is no increase in sale volume of wine cases.
1.10 Summary of evaluation
Majestic has taken a safe and conservative approach to business that had till a few years back brought good results in the form of consistently increasing sales and profits. However, the company has to increase sale revenues to sustain its advantage as a small player and keep a hold on its market of wine buyers.
The key strengths of the company are:
Strong Financial structure - Majestic has maintained a very low debt level in its Capital Structure and has the flexibility to raise long term debt. The interest coverage ratio is also at a very safe level.
Operational focus and loyal customers - Majestic offers free delivery throughout mainland UK, 7 days a week including Monday and Saturday evenings. This commitment to customer requirements has brought it a loyal customer base. This can be seen by the increased average spending per transaction from ÃÂ£123 in 2007 to ÃÂ£133 in 2008 representing an 8% increase.
Good cash management - Good cash management has helped the company in raising capital for its short term investments. With its efficient working capita; cycle in which the transactions are timed right, they can pay each bill as it comes due, maximizing their efficiency.
Some areas of concern are:
Flattening sales trend - Majestic shows a slowing sales trend in the last two years of business. The company needs to explore new areas for expansion to drive growth for future sustainability.
Falling share prices - The lacklustre sales performance is impacting the share price as shareholders don't see any future scope of growth. This can be a cause of concern if the company wants to raise capital in the future which will be difficult to come from existing or new shareholders.
It can be summarised that Majestic Wines Plc had been performing quite well in the recent past till 2006 but the growth in business has slowed down in the last two years in 2007 and 2008. With its prudent financial management and efficient operations the company should continue to perform well in the near future.
2.1 Additional information that could have been useful
Financial statements represent a good starting point in judging a company's financial strength; however, they are only a starting point in the analysis. Though most of the information needed to check the shareholders returns and financial situation of the company are available in the Annual Report, some important information is still missing. The Annual report mentions a like for like store sales increasing by 2.4% in 2008 but there is no detail on how this sale is being measured. The key to increasing sales is having more retail stores but this can impact it Return on Assets. It would have been useful to study the trend of sales per square foot of store space. However, this information is missing from the Annual Report. There is no detailed information regarding the economic environment and risk, and it is only briefly mentioned in the note on financial risks. Also there is no information regarding market share, competition analysis and concrete discussion on future positioning strategies. As per the statement of Majestic's Chairman, the company has continued to show an increase in profits for 11 consecutive years and this is shown as trend graph in the Annual Report. It is also encouraging for the shareholders to note that the company has been paying increasingly higher dividends for the last 5 years. However, there is no information on Majestic's historical share price that can give an impression of the stock's performance and previous capital returns. Stock market volatility cannot be measured by the information from the Annual Report alone. A 5-year share price trend and comparison of the same with the movement of FTSE100 Index would have shown the rapid decline in the company's share price. Industry characteristics and trends can indicate if there is future profitability, threats of new entrants, substitute products. Market dynamics of customer segmentation, competitive risk climate, and price structure can indicate the position of the company and its future potential to sustain the generation of profits. Investment risk also is important information to judge the risk associated with the company's share. This can be measured in terms of volatility or the Beta value of share. The value of its assets is mentioned at cost viz. the value of share capital of the companies which are owned by Majestic are valued at cost. The current value of these assets may not be the same as their acquisition cost. To complete the picture, one must acquire more information about the company's products, people, technology, and other resources that may give it a competitive advantage in the marketplace. This information is not fully available in Majestic's Annual Report. Hence the Annual Report is not sufficient as a source of information to make an analysis of the performance of a company. Inputs from other sources are required to make a balanced and in-depth judgement.
Annual Reports (2006, 2007, 2008) Majestic Wine Plc
Financial figures for Berry Brothers & Rudd
Dick Davies (2002) Finance and financial accounting Vol. 1 & 2
Parker, R.H. (1999), Understanding Company Financial Statements, Penguin Group, England, p.74.
http://markets.ft.com/tearsheets/performance.asp?s=mjw Share prices for Majestic Wine Plc