N Brown (BWNG) has a number of characteristics that we would ordinarily like to see in a company. The clothing retailer operates a diversified portfolio of 11 brands that focus on underserved niche markets such as people who are size 20 and above and women over the age of 50. Such a focus should, in theory, generate strong returns. What’s more, it is closing 20 stores to become an online-only brand, which frees it from the bricks-and-mortar costs that are weighing on many UK retailers.
However, the group’s growth has been driven by its financial services division through which it allows customers to buy on credit. While this is extremely profitable for N Brown when customers make payments on time, we find it worrying that the company is selling more clothes on tick when the UK economic outlook appears to be deteriorating. With many accounts in arrears and impairments already heading in the wrong direction, we think the shares are best avoided.
Rising arrears
Falling profits
Recent dividend cut
Lingering PPI liability
Niche markets
Recent results ahead of expectations
Product revenues – which come from direct sales, as opposed to those made on credit – fell 5.6 per cent in the last full year of trading to £616m. Management attributed this to a range of factors such as the closure of stores. However, even excluding stores, product sales were down 4.2 per cent due to a wider malaise in fashion retail. The trend continued into the first quarter of the current year, with product sales down 5.4 per cent. Digital sales accounted for 83 per cent of the total during the three months.
Growth has been coming from the financial services business, with net customer loans up from £531m to £585m last year. The group allows customers to open credit accounts to spread the cost of their purchases over time in exchange for hefty interest charges. Financial services revenues were up 10.8 per cent last year to £299m, and 8 per cent in the first quarter. The group finances lending to customers with borrowings, which was reflected in a 35 per cent increase in net debt to £468m last year.
Based on a perceived improvement in loan quality, the group reported an improvement in the provision rate last year – bad debt provision as a percentage of gross trade receivables – from 17.9 per cent to 14.2 per cent. However, somewhat at odds with this was a worsening in both accounts in arrears and gross margins, which followed three years of substantial improvements (see chart below). What's more, impairments as a percentage of year-end net customer loans rose from 18.7 per cent to 20.3 per cent.
Investors should be pleased fines for PPI misselling will soon be done with given the deadline for claims is set for the end of August. While the final bill is a source of considerable uncertainty, last year N Brown recognised a charge of £45m to reflect the cost of claims. Along with a £22m charge for store closures and a tax settlement, exceptional costs totalled £146m, which more than wiped out statutory profits. Management expects PPI to cause net debt to spike at £475m-£500m this year before ending the period at £440 to 460m.
| N Brown (BWNG) | |||||
| ORD PRICE: | 110p | MARKET VALUE: | £312m | ||
| TOUCH: | 110-111p | 12-MONTH HIGH: | 169p | LOW: | 81.7p |
| FORWARD DIVIDEND YIELD: | 6.5% | FORWARD PE RATIO: | 5 | ||
| NET ASSET VALUE: | 109p* | NET DEBT: | 150% | ||
| Year to 02 Mar | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) | |
| 2017 | 888 | 80.6 | 22.0 | 14.2 | |
| 2018 | 922 | 81.6 | 23.6 | 14.2 | |
| 2019 | 914 | 83.6 | 21.2 | 11.4 | |
| 2020** | 916 | 84.1 | 23.2 | 7.1 | |
| 2021** | 936 | 86.7 | 23.9 | 7.1 | |
| % change | +2 | +3 | +3 | ||
| Normal market size: | 15,000 | ||||
| Beta: | -0.60 | ||||
| *Includes intangible assets of £145m, or 50.9p a share | |||||
| **Peel Hunt forecasts, adjusted PTP and EPS figures | |||||
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