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N Brown falls on margin call

As margins contract in retail but grow in financial services, investors are spooked by the number of customers buying on credit
January 24, 2018

The market is growing increasingly wary of the financial services division at clothing chain N Brown (BWNG). Investors gave a third-quarter update from the owner of Simply Be the cold shoulder, sending the shares down 15 on the day of its release. In fact, the shares have a lost around a third of their value since last September.

IC TIP: Hold at 237p

That’s because margins are expanding on financial services, but contracting faster than expected on retail products. Gross margins for the latter are now expected to shrink between 225 and 250 basis points by the end of the current financial year, compared with previous estimates of between 70 and 120 basis points, due to higher levels of discounting. Financial services margins should improve by between 500 and 550 basis points, five times better than previous guidance. The company said this reflected improvement “in the quality of the customer loan book”.

But it also ties into wider industry trends: UK consumers have dealt with tighter finances by borrowing more money via high-interest credit arrangements such as the ones on offer at N Brown. It should also be said that N Brown’s financial products have come under scrutiny before when the Financial Conduct Authority (FCA) concluded its insurance based products fell foul of wider PPI investigations.