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N Brown is the new black of the retail sector
Archived article dated Thursday July 3rd 2008
Home shopping group N Brown has delivered what must be one of the most positive trading statements in the sector over recent months with the company not once using the word 'cautious'.
Instead it stated that it believed the age and demographics of its customer base, along with its specialist product proposition, will deliver further progress during the rest of the year.We reckon this was positive stuff indeed. And so did the City with retail analysts re-iterating their 'Buy' recommendations on the back of a consensus view that N Brown has one of the most capable management teams around.
Their expertise helped deliver a 12.3 per cent increase in turnover from continuing operations for the 17 weeks to June 28 - despite tough comparatives last year. What was especially pleasing was that this growth was broadly based across the group's various existing customer and product groups. A full eight per cent of the 12.3 per cent was down to current N Brown shoppers.
This bodes well in the current tough times as it shows the group is not reliant on growth through customer acquisition, which is not only expensive (thereby affecting margins), but can also potentially lead to a higher exposure to bad debts since any new customer is an unknown quantity.
As a result of its ability to squeeze more out of its existing base N Brown has experienced almost no deterioration in its bad debt profile. What helps is that its core customer is aged 58 on average and is less inclined to build up high credit balances and saddles themselves with hefty loans. This is why N Brown is being particularly careful with some of its new brands and products as they are targeted at more free-spending, debt-accumulating younger customers.
It is for this reason that the sharp fall in its share price from mid-April, initially on the back of a profits warning from Findel (that announced an increased exposure to bad debt) was probably unjustified.
This is certainly the view of both Landsbanki and Investec who suggest that at a current share price of around the 183p level N Brown represents a good buying opportunity. And it is a similar story at Numis, which has set a price target of 240p. There looks to be some support at this level because the price held firm in the face of another meltdown in the sector this week following the shock profits warning from Marks & Spencer.
What the City is backing is a business that is increasingly web-based as internet sales now account for 31 per cent of total sales. This represents an increase of 45 per cent since the same period last year. But regardless of the rate of the switchover from taking orders over the telephone to online N Brown should be particularly attractive in the current climate because it does not have the headache of a stores base.
It has no issues over putting its expansion on hold, right-sizing certain stores and closing poorly performing outlets. The equivalent for the company is to scale back some of its mailings and curtail certain expensive recruitment drives, which it plans to initiate in the second half of the year. Clearly such action is far less disruptive and significantly cheaper than re-jigging a store portfolio.
For this reason and the expected continued solid performance of the group's management there is little to suggest that N Brown will deliver any shocks to the market. As such this makes it a much more attractive proposition than most in the sector and one that could represent an opportunity for any investor brave enough to enter the market.
Tagged as: glynn davis | n brown group
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