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Likelihood of N Brown re-rating grows

Despite its increasing online sales, international growth prospects, and unusual position of having an audience that is gradually getting younger, home shopping company N Brown continues to be valued at a discount to the retail sector. By Glynn Davis, City editor


Likelihood of N Brown re-rating grows

Maybe this is because its performance has been overshadowed recently by its exposure to bad debts and the fact that the average age of its customers is a relatively mature 57. If so then this is probably unjustified because the company has shown a strong track record of managing bad debts and it is forecasting a reduction in their effects during the second half of the current financial year.

And as for an old customer base – they are still a profitable bunch and the reality is that the average age is reducing gradually as the company’s titles (catalogues and online) for younger people (30 to 45 year olds) are delivering the fastest growth within the group. In the first half they grew at 12 per cent versus three per cent for the 45 to 65 year-olds group, which represents N Brown’s main customer segment.

This younger grouping’s propensity to shop online is undoubtedly helping the growth of N Brown’s online sales, which are a great way of reducing costs and increasing margins. Proof of how the internet is growing came with the reporting of the group’s interim results (for the 26 weeks to August 29) this week that showed online revenues up by 21 per cent to £128 million.

They now account for 38 per cent of total group sales compared with 33 per cent last year. This represents impressive growth when you compare it with the 4.9 per cent growth rate that the group achieved overall in the first half.

Its pre-tax profits came in at 13 per cent ahead of last year and prompted analysts to suggest there is a high likelihood that they will nudge their forecasts up later in the year. Brewin Dolphin also pushed up its target price from 280p to 300p, which compares with a current share price of 256.9p.

This positive consensus stance is supported by current trading that came in one per cent ahead of last year for the first six weeks of the second half, which is a decent performance based on the 11.8 per cent comparative. And the previous year to that was also strong, with another double-digit gain. The good news for the group is that going forward the comparatives start to soften.

Online sales during this six-week period are up 15 per cent and it is this continued growth that has undoubtedly given the group the confidence to leverage its internet infrastructure and open shops overseas. In February N Brown launched a German language version of its Simply B catalogue and website, which has achieved sales of £1.1 million in the first half.

The company is already talking about entering the US market and is hoping that it will be in a position to press the ‘go’ button for an autumn/winter 2010 launch if the conditions are favourable.

Such growth prospects combined with the group’s positive talk about the receding likelihood of more bad debts places N Brown in a strong position, which is why its discount of over 20 per cent to the sector is surprising. On a PE of a little more than 11x earnings for 2010 the prospects for its shares to advance and bring this number more in line with its contemporaries looks highly likely.

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