N Brown Group - the fashion makeover continues

N. Brown Group (BWNG.L): This stock is still on the journey from its roots as “mail order clothes for pensioners” to “ multi-channel, specialist fit fashion retailer”, with brands such as JD Williams, Simply Be and Jacamo being their three “Power brands”.  It has not all been plain sailing, but today’s interims, to 29^th August 2015, have pleased the market. Group revenue is up 4.2% at £415.8m, with the three power brands up 8.4%. However (in-line) underlying trading profits are down 15.9% at £35.0m, due to bringing forward Autumn/Winter range marketing spend and the extra costs of seven more Simply Be and Jacamo stores (now totalling 15 in all). Exceptional items were £14.8m, but are guided to be less in H2 at £2m-£3m. Adjusted eps are 5.74p, down from 11.56p and the interim dividend is held at 5.67p. Net debt has edged up to £239.8m, from £205.2m. Financial services revenue was down 0.4% at £116.6m, but on an improving trend saw Q2 revenue up 1.0% after Q1’s -1.9%.

Looking forward they comment that the year will be “significantly H2 weighted…..H2 has started well, with a pleasing performance in September.” Guidance remains for a 100bp gross margin drop, mainly in Financial Services (-200bps to -300bps) with Product somewhere in a range -25bps to +50bps. They are in the “early days” of attracting cash customers, who don’t need a credit account. At the moment half of new customers open a credit account. There is clearly much here to suggest that the group is progressing well. They are aiming, eventually, to have 25 stores covering 85% of the population, although it is still early days for judging the success of the “bricks” initiative. The improving economic backdrop will help, with households gradually loosening belts. The move towards a National Living Wage may raise their costs, but will be far more significant in terms of boosting customers’ spending power. After a yo-yo year for the shares they are up at 337p today. FY2016 consensus eps of 24.6p (which assumes that H2 does make up for H1) is a PE of 13.7x. A maintained dividend of 14.23p would be a yield of 4.2%. There are still many moving parts to this story. More cash and fewer credit customers appeals, as does broadening the appeal of the offerings. Yet, the old core demographic of older customers was reliable and growing, whilst more fashion and stores means more risk and volatility, as does the toehold in the US (where losses were halved). So, for now, I will stay on the fence, but I can see why many will be more enthusiastic than me. (Neil Cumming^, 14th October 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower