N Brown Group (BWNG)

Plus Size Profits

Isn’t it great when what you’re looking for falls into your lap? Granted, it’s not quite the woman of your dreams turning up at your house and asking for directions, or a Euromillions lottery win making me a very rich man, but N Brown does tick all the boxes for my slowly shaping-up portfolio.

They are a retailer who I suspect most won’t know simply by name, as they have a huge catalogue of brands under the N Brown umbrella – Jacamo and Simply Be are the two that rung the most bells with me, but the list is truly extensive. It being a retailer is great, because I like retailers; especially since very few institutional investors seem to at the moment. The sector is riddled with the likes of Home Retail Group, HMV and Game, trading on tiny P/Es. The market isn’t buying a maintenance of their profits. I buy into N Brown, though, and I buy in fairly solidly –  I had decided fairly quickly that it was a business that I liked the look of, and after finding no particular warts in their annual accounts, I was sold.

The business to start, then. I think a comparison to the sector is relevant here. Why are investors sceptical about retail? Firstly, the recovery is uncertain and consumers are being squeezed. Wages aren’t keeping track with inflation and credit growth remains considerably lower than pre-crisis. There’s not much N Brown can do about this wide, macro picture, so we’ll come on to that later. But sectorally, there’s other reasons for the decline in retail. High street rents fixed with the operating leases so discussed around the blogosphere lead to high fixed costs – and with the advent of the internet and its astronomical rise to the height of consumer focus, physical retailers are being hit. This, of course, all comes to a head during the recession. Consumers shop around more, businesses have less unit contribution to pay their fixed costs, and the sector gets hammered.

N Brown avoids this fairly neatly by operating in two more cost-effective  channels- online and catalogue. Online makes up about 45% of their sales, and this percentage is growing fast. This mix means they keep more of the lovely gross margin – 54(!)% – for themselves, as operating margin sits at 14% last year. This seems very reasonable for a company operating in the midst of a recession. The chart top right shows their strong and steady revenue and profit increases. In fact, only one year in the last ten did they fail to improve revenues – and it wasn’t recent!

I think part of their resilience comes from their strategy. Their numerous brands are all specialised, niche operations. Jacamo, for which I recall the advertising campaign, made a big song and dance about having clothes in much larger sizes than most other retailers. Simply Be has a similar mission – bringing fashionable clothes in sizes that have a far broader audience that the usual 4-16 slimline fare. I love this strategy. Instead of having one big store, they split up their operations to make it easy for the consumers. Instead of digging through 100 different websites looking for clothes that may fit them, why not go to one place? It’s not just size related, either. They also segregate according to age (carefully, of course!) – splitting up their younger, midlife, and older brands. I think this gives them an enduring competitive advantage – customers so well targeted are likely to be more connected to business and more loyal. Repeat business is what retailers love, as it cuts down some of the cost competition.

They also plan to expand, and expand in a way I like – steadily and logically. They’re looking to tap into the US market, which is always difficult but potentially lucrative – and they’re trying to grab a slice of the health and beauty sector. This last one ties in to their focus on cross selling – when selling women a pair of shoes, why not get them to stick with a partner site for their lingerie and eveningwear? As you can probably tell, I think the ‘great business’ part is fairly wrapped up for me. Of course, that’s only half of the story – what about the ‘reasonable price’? Well, N Brown is currently priced at a market cap of around £760m. This puts them on a P/E of 11ish, which is fine by me. Given the current conditions in the market, I have no problem with paying this price for a mid-cap business with growth prospects. 

Finally, I feel I should probably address my wider macro view on retail, and explain why I was actively searching for some exposure in my portfolio. The chart above left shows UK retail sales (clothing, footwear, textiles) over the last 10 years. Interesting to note, for me, is that the recession we’ve just exited was actually just a period of nominally flat retail sales. In real terms, of course, it declined – and this was significant with the high level of inflation. Still, over the 08-09 period N Brown grew strongly. I won’t make predictions about the future of retail sales, but even if it were to fall back down to the 0% line, which seems unlikely to me, it does not make sense to call for revenue to fall unless you see N Brown losing market share – and I certainly don’t. Indeed, in the last period of nominally flat sales, they saw decent growth.

Cost pressure wise, I expect the right chart above may explain some of the picture. The cotton price has increase 400% recently, though forecasts expect it to tail off in the near-term. Still, as far as I’m aware, the vast majority of  manufacturing cost goes into labour, and I expect transportation plays a non-negligible role. In essence, on the cost side, I’m shooting in the dark a little. As ever, I place my trust in the invisible hand for normalising commodity prices. While China may be modernising fast and wage costs there rising, there’s still a pool of cheap labour in Asia which I think will remain at least in the near-mid term.

Still, I’ve explained my sectoral view, and it’s not completely firm in some points, so the most logical thing to do is to compare to other sector stocks. On PE terms, they’re only slightly more expensive than Next, who are saddled with considerably more debt and has seen sluggish growth recently. The same story applies with Debenhams, and in that case you’re also buying years of onerous lease commitments totalling over 5 times their market cap. Perhaps the fairest comparison is with ASOS, though that’s also imperfect. Asos is seen as a growth business, which explains their P/E. This ranges somewhere from 90ish to a stratospheric 180, depending on whether you take pre or post exceptionals.

If I was running a hedge fund I’d be long N Brown and short ASOS in a snap. One is pricing in a decline, the other is pricing in a phenomenal rise. But I’m not, and with this portfolio I’ll be keeping things simple, so I’ll just buy into N Brown for growth prospects, reasonable valuation even given no growth, and a sound business.

5 Replies to “N Brown Group (BWNG)”

  1. Calum

    Nice summary. One thing I noticed was that the company appears to be quite heavily into credit. I see the receivables is over £400m (if i remember right) and more than 1/6 of revenue comes from interest. The company gives good clarity on the receivables balance and seems to have sensible policy on quickly writing down bad debts but it seems like it is quite liberal in giving out credit and I’ve never really seen a retailer do this before. What are your thoughts?

    • Lewis

      Hi Calum,

      I did think this was a little unusual, but after reading the figures I shrugged and took the mangement’s line. Why people purchase using so much credit is beyond me, but as you say, the company’s line on bad debt seems to be legitimate and they’ve tightened up their policy during the recession.

      I’d tend to believe that bad debt, if it were a huge issue, would have shown up in the last couple of years. As such, I can’t see a reason that it’ll hurt the company going forward. The vast majority of it is current (>70%), and they write off around 10% as doubtful. These numbers seem reasonable to me, so I just congratulate the company on its fortunate income stream.

      Perhaps I am being naive? I am very much new to this, and haven’t seen this before, either – do you think the receivables balance is a big issue given its structure?

      Current 381.4
      0 – 28 days 69.3
      29 – 56 days 25.5
      57 – 84 days 16.0
      85 – 112 days 13.4
      Over 112 days 14.0
      Total 519.6

  2. Calum

    The company looks like a good find and it looks to be making some smart acquisitions. I would take a closer look but have my hands full elsewhere atm. I really don’t know anything more than you. I have the numbers in front of me so what worries me is…

    the “rendering of services” line in the revenue breakdown – it was 37% of revenue, this seems a lot for a company which is just selling clothes. looking to revenue recognition, “rendering of services” is defined as “interest, administrative charges and arrangement fees”. Fair enough, what I don’t get is a bit further on…”Such revenues
    are recognised only when collectability is reasonably assured”. Considering that this is over 1/3 of revenue, that definition is quite ambiguous.

    the other thing was the bad debt. £50m in LFY, for a company making £70m net profit that seems like a lot. The company has clearly reserved pretty well for it but 10% bad debts seems a lot. And just generally, I don’t get the difference between “current” and “0-28 days”. I don’t get why it is such a big part of the balance sheet, 65% of total assets. It does have some kind of lending facility against it which improves liquidity and if the bank thinks it alright then it probably is.

    i think the problem is that the statements aren’t presented in a particularly clean way. again, a bank probablly would lend against bad debts but the size of the figures makes the company look pretty illiquid. i would be interested to see what % of sales are on credit as that would probablly answer all questions.

    • Lewis

      Upon further digging, the structure of the receivables comes about from the way they go about doing business – they actively encourage shoppers to use their ‘personal account’ system. Taking a look at Jacamo and Simply Be’s websites, then, we see that they offer a system whereby you simply buy what you want from what is essentially a credit facility. You then have a statement informing you of your minimum monthly payment, and the total balance outstanding. It’s something I, as a consumer, would be wary of – but the figures speak for themselves on the uptake. It’s sort of a ‘casualisation’ of debt within the company, which worries me less than if the company was writing loans for jumpers. I know that phrase will probably ring alarm bells with some, so I should clarify – the way it is handled on the website makes the personal account seem more like an issue of convenience – i.e., not tediously paying for every purchase, than one of making loans to customers. Hence, I’ve no reason to expect a skew towards those less likely to pay – which I would in the alternate scenario, whereby people who take out loans for such small purchases are obviously on dodgy financial footing anyway.

      My assumption when reading the credit breakdown was that ‘current’ covers a range of lengths of debt – essentially the balance remaining on the personal accounts. They state that their average credit period given is 241 days, which implies to me that the table I’ve pasted above musn’t be a complete breakdown – more likely the individual figures are for accounts where the creditor is overdrawn/hasn’t met their minimum repayment. Current must have a fairly long maturity. I find it a bit unusual to be honest, but looking back through their previous annual reports it’s been a long term thing for them – they seem to simply roll over the debt to the next year and have a fairly consistent bad debt figure. I hadn’t mentioned they have a fairly large home and leisure segment, which explains some of the debt. This makes a lot more sense to me!

      I almost look upon the £50m as a positive, in a way – if it were unreasonably low given the economic environment, it would raise my suspicions a lot more. In a sense, I almost expect this figure to come down as the macro picture improves and contribute less to dragging down their accounts – and it should be noted, as they say, the concentration of credit is minimal, as they have 1.6m creditors. Agree on the structure of the statements though. More info would be nice. Perhaps I’ll glean something from an analyst call or similar..

      Still, they’ve been noting this in their reports for the last 4 years, and receivables as a percent of total revenues has come down modestly. This implies either a stricter credit policy, or an increase in provision for bad debt – both positives in my book. It means the company is taking the issue seriously.

      (Comment was edited since original posting, some figures added)

  3. Calum

    sorry, i forgot to add that the company hasn’t seperated its cost of goods from its finance stuff. for example, i might look at inventory turns to see how its sales were shaping up and, obviously, this would be especially useful considering the lack of info about this area generally. I would suspect its somewhere between 2.5-4x looking at the figures but thats just a guess.

Leave a Reply

Your email address will not be published. Required fields are marked *