Out of fashion N.Brown looks attractive

N.Brown, the Manchester based catalogue and internet supplier of fashions for the outsized classes (who are always with us and of whom I am a reluctant member) has just produced its first half results for the year to 29th August 2015.

A little history

I see that I last penned (or rather finger jabbed, since this is the digital age) a piece on the company last June after the first quarter’s results. I wrote then as follows: “Last year to 31 March 2015, it had sales revenue of £818 million which had risen steadily from £718 million over the preceding four years; a compound rate of about 2.5% p.a. according to my arithmetic. So the top line of revenue growth had been healthy enough in a particularly tough period for retailing as well as the UK economy generally; a clear signal that the company has things that people want to buy and an ability to sell them.”

I see that I went on to point out that the picture was rather different on the profit and equity accounting lines, pointing out that earnings per share on a comparable annual basis, fell 3% in 2013 and 1% in 2014, then by a whopping 26% in the year to March 2015. Adding that one initially got the impression of a management which had decided, after a period of its net earnings floating irresolutely in the doldrums, to take action and forget about earnings per share for a while, by spending on investment to enhance the competitive profile of its well established business model.

So the latest results are particularly interesting in view of that judgment some four months ago.

The half year results to the 29th August 2015

The company is still demonstrating that it is selling things that consumers want to buy; even more so given that top line sales revenue in the first half increased on an annual basis by 4.2% to £416 million. (Maybe the rumour is true that the Government has plans, prompted by the food manufacturing industry, to change the national anthem to ‘Food Glorious Food.’)

On the other hand, statutory profits, thanks in part to the closure of eighteen physical ‘brick’ outlets for clearance items, because they are now destined to be sold online as a further step in the firm’s move to a more digitalised market presence and relationship. Now two thirds of the N.Brown Group sales are ‘on line’ as opposed to being traditionally sold through catalogues – and the fifteen high street sites that are deemed to be auxiliary support for the now primary online business sales model. N. Brown is now predominantly ‘more click than brick’. Furthermore, the company is planning the introduction of a new digital sales platform which will give it commercial access to the US market; that is due to be operational in 2017. As a harbinger of future success in the US, these first half results recorded a 35% increase in sales revenue although the US business was in loss.

It is worth pointing out that the company does online selling well and has a good track record in converting a high number of visits to the site to actual sales. Economically, one of the benefits to a fashion business of being online is the much greater flexibility it allows. Fashion product offers can be changed more rapidly, whereas the traditional catalogue distribution model brings with it relative inflexibility, which rather ties the hands of management to a seasonal pattern of activity. In a world of unreliable weather and changing fashions and procurement economics, that is a redoubtable new advantage.

Naturally, the statutory half year results overstate the gloom because they arise in part from a company that is investing to reap greater commercial advantage of eventual lower operating costs and a much wider market presence once it gets its new sales and marketing platform installed from 2017 onwards.

Looking at the half year, trading profits were down just under 16% in ‘underlying’ comparable, year on year terms; but when after exceptional costs are taken out, they were down just over 14%. So it looks as if not all of the poor trading and operationals were down to the exceptional costs of changing the business and its mixture of assets. Self evidently, the US result contributed to that. Nevertheless, the interim dividend was held. Unsurprisingly net debt increased by 16% to £239 million.

The outlook

Clearly, the company has proceeded as seemed probable last June, sacrificing current earnings for investment in future earnings. But what does the market expect of future results?

First, judging from consensus market estimates, it expects the uptrend in top line sales revenue to continue. To be specific: a plus 5.3% increase in sales this year (last year registered no sales growth) and a further 6.3% next year. At the year end to February 28th 2017 N.Brown Group sales are estimated to reach £910 million in contrast to the historic sales figure of £818 million at the end of last year.

As for earnings, the market consensus has been for a 20% increase in earnings this year to 24.6p and further 10% next year to 27p, putting the shares on forward price to earnings ratios of 13 and 12 times respectively. The consensus dividend forecast is for an annual dividend yield of 4% this year rising a bit to 4.25% next year; that is to say, an estimated dividend pay out of 14.27p for this year and 14.86p for next year. The historic dividend of 14.23p gives an annual dividend yield of 4.0%.

The reported PER for the FTSE 250 Index, of which N.Brown is a constituent, is 18.6 times and the reported dividend yield 2.52%. Those numbers by themselves rather suggest that N.Brown shares look good value. Moreover, the historic dividend yield of 4% offers very competitive attractions in a period of low inflation and an ever delayed ending to quantitative easing. In short, a good income, whilst waiting for improvements, hopefully and particularly after 2017 in the US. The UK and US economies are still looking to be good relative performers.

The twelve month chart shows that the share price at 348p has broken out of the downtrend in the share price that began February last year. The shares now appear to be towards the bottom of a 300p-450p trading range. If that is the case then there is a potential possible shorter term, decent profit to be made. As I always say, these chart readings are inevitably subjective, so look for yourself. 2017 offers longer term US prospects which seem to underwrite best expectations.