From the affluence of south-east England, it's easy to be snide about mail-order retailer
So why on earth might I be interested in putting Brown's shares into the Bearbull Income Portfolio? Several reasons. First, I can blame dear old Walter Schloss, whose obituary I wrote last week. Favourite among this outstanding US value investor's stock-trawling techniques was each week to search for anything interesting in the list of stocks hitting their 52-week low. That prompted me to do the same, and Brown's name popped up.
Besides, I am sort of biased towards Brown. Way back in the late 1970s - okay, I confess my age is towards the upper end of Brown's 'mid-life' customer grouping - I made great returns from Brown's shares as the company began its progress from corporate tiddler, with a stock market value of about £2m, to constituent of the FTSE 250 index. It was, and remains, the corporate plaything of its chairman, Lord (David) Alliance, who effectively controls the company. And it was, and remains, focused on niche mail-order markets, mostly budget-priced outsize womenswear.
That brings snags and benefits. The chief snag is that Brown concentrates on customers with limited spending power who have been particularly hard hit by the UK's recession. A secondary snag is that, in a real sense, Brown's customer base is dying off.
Sure, the demographics aren't all bad – an ageing population brings obvious potential for a retailer that focuses on that segment. But, if outsize and elderly were such great markets to be in, more retailers would target them. Partly they don't because they are so complex to supply. All those outsizes mean that Brown supplies women's clothing in sizes up to 38 (don't ask the hip measurement), in chest sizes up to 58 inches and, for men, in chest sizes up to 70 inches. That adds up to an awful lot of stock-keeping units, the potential for logistical nightmares and the absence of the economies of scale that make for fat profit margins.
True, but it also helps create barriers to entry, which is the chief benefit of Brown's niche. In the language of internet retailing – and Brown now generates almost half its revenue from web sales – Brown is on the 'long tail', to use the phrase made famous by technology writer Chris Anderson. In other words, it sells a little of a lot (small volumes of lots of lines), whereas most retailers – especially those with a big high-street presence – want to sell a lot of a little (big volumes across comparatively few product lines). The fact that Brown does what others don't really want to do and that it's much practised in its chosen area gives it a big advantage. Potential competitors are unwilling to risk the resources needed to grab a share of a market that isn't growing much – and won't.
Then again, there is a price for everything and it may be that Brown's share price has fallen for good reason. The best guess is that, clear of £3 in mid 2011 and rated at 12 times forecast earnings, the price had got ahead of itself. Now, at 225p and rated at eight times forecast earnings for the year just begun, the price looks more realistic for shares in a retailer whose trading is clearly tough but which, according to its bosses, will deliver on City forecasts when it announces results for 2011-12 next month.
It helps the case for inclusion in an income fund that the prospective yield is 6.2 per cent on a payout that's likely to be covered twice by earnings. That said, that constrained level of dividend cover indicates that dividend increases will be restricted to the pace of earnings growth, which will almost certainly be lower in the next 10 years than the previous 10. So a jump in the share price will depend on higher ratings for retailers' shares, or – longer term – the likelihood that one day Brown will be taken over. After all, its controlling shareholder, Lord Alliance, is coming up to 80 – that's old, even by the standards of Brown's customers.
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