Sell N Brown as sales fall

Mail order group N Brown reported a sharp fall in September sales and it may have to cut prices to clear stock, says Questor

N Brown
350.2p+23.1p
Questor says SELL

Clothing retailers were hit hard in September as unseasonably warm weather meant fewer people treated themselves to a new coat.

N Brown [LON:BWNG] said yesterday that sales recovered in October and November, sending its shares up more than 8pc.

The mail order shopping group, which sells everything from homeware and shoes to clothing, said October and November sales increased by 1.5pc and 3pc respectively, after a 10.8pc slump in September. That meant a 2.3pc decline in overall third-quarter sales, and a 1.2pc fall in the year to date.

Questor is concerned that investors diving back into the shares may be jumping the gun. N Brown has managed to increase sales recently, but at what price? The build-up of stock from the slow September may have been sold at reduced prices to remove the overhang.

N Brown did not provide details on the profit performance but did say that its gross profit margin was in line with management expectations, and the company provided “competitive value” for customers. The retailer said it expects “extremely competitive” conditions to remain until the end of the year and kept guidance unchanged.

Market expectations are for pre-tax profits of £88.6m in the year to the end of February, down 9pc on the £97.3m in the previous 12 months.

The other challenge facing the company is shifting from a catalogue-only business model, which is low cost, to selling online, in stores and catalogues and in America, which is increasing selling and administration costs. In the first half of the year operating profits declined 6.6pc on revenue down 0.6pc.

N Brown is still generating plenty of cash. However, with capital investment on a new distribution centre increasing to £30.8m, from £8.5m last year, net debt rose to £205.2m, from £197.9m last year. The debt levels compare with net assets of £495.3m.

The group’s reputation has been built on clothes in bigger sizes; the current poster boy for the company is the cricketer Andrew Flintoff and brands include High & Mighty, Jacamo and Simply Be.

We have previously warned about slowing sales and said it was “prudent to take some profits” (Sell, 465p, May 3). The shares are down 25pc since then, and with debts rising and sales slowing we retain that prudent approach. Sell.