City viewpoint: Lowly view of N. Brown unjustified

Despite it not having a store portfolio to worry about and having a number of growth drivers in its favour, home shopping operator N. Brown continues to be rated below other clothing retailers such as Marks & Spencer and Next.

By Glynn Davis, City editor

Maybe it is simply as case of analysts and investors not being particularly turned on by its core product of larger sizes for older women. It there is any such truth in this then it should be cast aside as N. Brown has a number of characteristics that undoubtedly place it in a stronger position than some of the mainstream high street clothing retailers.

First and foremost it is a home shopping operator with sales increasingly skewed towards the internet. Even with the company's high average age of customer - it classifies the 30 to 45-year old in the category of 'younger' - it is seeing all age groups migrating from ordering over the phone to transacting online.

The percentage of sales taken over the internet has grown from 16 per cent of group turnover in 2006 to 34 per cent this year and this trend looks set to continue. This is giving N. Brown an increasingly attractive cost base. Consider that its rent and rates account for a mere one per cent of sales, whereas the typical high street retailer has to lash out 12 per cent of turnover on its store base.

According to research from broker Brewin Dolphin, N. Brown achieves a gross margin of 55 per cent compared with 45 per cent for high street retailers, which translates to tasty profits with it enjoying a 15 per cent operating profit while its high street rivals are looking at a much lower five per cent.

Its attractive model should not be downgraded by the perception that N. Brown is locked into supplying dowdy product to an ageing customer base. The fact is that it is not just about older customers as the company's fastest growing segment is its younger grouping, which accounted for 25 per cent of total sales in 2006 and had grown to 30 per cent last year.

Although this younger demographic is admittedly decreasing, N. Brown is able to offset this with the growth in the number of people in the UK that are being classified as overweight or obese.

This grouping is its target customer and accounts for the bulk of group sales, with 85 per cent of clothing sales derived from customers sized 20 and above. This focus on larger sizes - some extremely large - has enabled N. Brown to create a unique position in the marketplace and its comprehensive range of non-standard sizing is unrivalled.

Amid all this good the City has undoubtedly been distracted by the bad debt exposure of N. Brown (and the other retailers who provide credit to their customers). At its full-year results last month the company announced an additional provision of £5.6 million in anticipation of deteriorating conditions.

However, a valid argument can be put forward that this is the action of a strong management team that is rightly cautious in these uncertain times, and it is unlikely that a provision of such magnitude will be needed in the current financial year.

If you take this positive view and combine it with the many positive characteristics of N. Brown then its prospective PE of 12x puts it at an unjustified discount to other clothing retailers.

Therefore, with its shares having under-performed the retail sector over the past quarter, there looks to be some decent upside potential that could take them to well beyond their current level of 231.5p.

glynnd@theretailbulletin.com