Why confidence in this retailer is at a five-year high

Retail has rarely been out of the headlines these past few days. Grim sales data, interest rate fears and the growing threat of Amazon after its acquisition of Whole Foods caused widespread concern.

But this week, Britain's nation of shopkeepers has bounced back. And this morning, N Brown defied sector doubters by making "an excellent start" to its 2018 financial year.

The online specialist fit fashion seller - plus-sized and over-50s womens' fashion - was one of the worst hit Thursday, down 5.4%, as its recovery since the EU referendum a year ago threatened to stall.

But it was back on track Tuesday – at one point up 15% to a 15-month high of 328p before settling back to around 300p. Bear in mind, they've not been above £3 since April 2016.

In a first-quarter trading update to 3 June, the firm smashed consensus estimates, with sales up 5.6% versus an expected 2.5%, and product revenue up 10.2% compared to consensus of 5.5%. This was "driven by strong Ladieswear performance", up 13.5% with Simply Be revenues up 20.5%.

As expected, Brown's credit arm, which allows customers to spread the cost of purchases, was subdued; but house broker Shore Capital expects this update to mark a low point for the division, expecting growth of 2% over the year.

Meanwhile, the firm said that its average selling price, average units per basket and purchase frequency, are all up year-on-year.

Shutting five loss-making SimplyBe/Jacamo stores by August, possibly including Oxford Street, will trigger a further £10-14 million exceptional charge. But this lot were "fully responsible for the £2 million annual loss from the estate reported in FY2017," we're told.

While Brown makes no changes to full-year guidance, broker Jefferies ticks expectations for pre-tax profit up by £1 million for 2018 and £2 million for 2019 to reflect the store closures.

And CEO Angela Spindler is confident, despite an uncertain outlook for the UK consumer, with high inflation and weak wage growth putting pressure on customers.

"At this early stage in the financial year, trading is back on track to meet our expectations," she says. "We continue to invest in our customer proposition and remain very confident in our future growth prospects."

Despite investors' positive reaction this morning, analysts are mixed on prospects. While ShoreCap's Darren Shirley is "as positive on the group's prospects as at any time over the past five years" – notwithstanding the obvious consumer headwinds – and Jefferies increased its price target, UBS was more cautious.

Analyst Adam Cochrane says a forecast 2018 price/earnings (PE) ratio of 13.5 times is a premium to UK clothing retail peers, meaning "N Brown will have to show continued evidence of sales outperformance and operational leverage to re-rate any further" after a strong recovery recently.

A rough 2014 saw brown shares more than halve between March and October, culminating in a surprise profits warning blamed on a cold snap.

But a self-help programme got sales growth back on track, underpinning a recovery that only stalled in the aftermath of last summer's Brexit vote when Brown shares hit an 11-year low

Since then the share price has pretty much doubled, and is up 37% year-to-date, with Shirley claiming "the group is increasingly in control of its own destiny".

Jefferies' Joe Spooner is on the same page, repeating his 'buy' rating and hiking his price objective by a third to 325p to reflect a target PE of 13.5 on full-year 2019 EPS. However, at 308p currently, the implication is the shares are fully valued, especially given risks to higher costs from further sterling depreciation or consumer weakness.

Still, a forecast dividend yield of 5%, might underpin sentiment. Spooner also argues that if Brown can manage product and financial service revenue growth 2% ahead of current estimates, and sustain a peak PE of 18 times 2019 EPS estimates of 29.8p, price potential is a far more bullish 536p.

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