N Brown dives, but big dividend is safe

A record-breaking Christmas came at a price for home shopping retailer N Brown and its investors today, with shares pummelled over weaker than expected margins.

Even though product revenues surged 2.7% in the 18 weeks to January 6, the City punished the Manchester-based company for its admission that the showing had been achieved at the expense of profitability.

Higher promotional costs meant that gross margin guidance on product sales for the year to March will now show a decline of between 225 and 250 basis points (bps) rather than the previous forecast range of 70 to 120 bps.

It was able to maintain its profit forecasts for the year because of a much better margin performance in its financial services arm, which allows customers to pay for product purchases on credit. The standard interest rate is about 24.9%.

Margin guidance in financial services will be much improved at between 500 and 550 bps, compared with 100 and 200 bps forecast previously. N Brown said this was due to the improvement in the quality of its customer loan book, which has added "resiliency" at a time of more challenging macro-economic conditions.

While this enabled N Brown to stick by full-year profit forecasts today, analysts at Peel Hunt said there was an "appearance of financial engineering rather than a genuine improvement in the quality of earnings".

They noted that N Brown's dividend yield of 5% remains secure and should offer support, but have still cut their target price to 275p from 375p.

The margin issues deflected from an otherwise strong trading performance, with SimplyBe the stand out performer after sales growth of 14.5% in the company's third quarter. The relaunched JD Williams brand was 3% higher and menswear retailer Jacamo rose 4.6%.

N Brown's US business moved back into growth with a 19% rise in revenues, while total online sales across the group were up 9%.

Despite today's share price slump, Stifel analysts think there's potential for N Brown to surprise on the upside in full-year results. They added that there was no justification for the company's 5% discount to the rest of the sector, based on a projected PE multiple of 12.6x.

They said: "Bumps on the road can happen and we think they are an essential part of a retail business process in the effort to continuously improve."

Stifel has a 345p price target and 'buy' recommendation, which is based on forecasts for earnings growth in 2019 and a projected 6% dividend yield.

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