Struggling home shopping company N Brown (BWNG) crashed 25% lower to 106.7p on Thursday after the online fashion retailer downgraded earnings guidance for this year and next in a nightmare of a Christmas trading update.
Savage cuts to forecasts reflected margin-crimping discounting in a tough third quarter for the UK clothing sector as well as reduced financial services revenue as the JD Williams-to-Jacamo brand owner tightens lending criteria in response to ‘wide-sweeping regulatory intervention’ across the financial services sector.
DAMAGING DOWNGRADES
Having coughed-up a PPI redress-driven alert in September, N Brown kick-started the New Year by downgrading adjusted pre-tax profit (PTP) guidance for the year to February 2020 to a £70m-to-£72m range.
That is materially below the prevailing consensus range of £78m-to-£84.1m and reflects a lesser than expected accounting benefit, the margin impact of highly promotional market conditions over Christmas and also lower financial services revenue.
Altering the way it manages its customer debtor book, N Brown also warned 2021 pre-tax profits will be flat because of ‘reduced scope for bad debt provision improvements’ combined with industry-wide regulatory changes, news that sent long-suffering investors heading for the exits.
Put simply, the steady improvement in the quality of the Simply Be-to-Ambrose Wilson brands owner’s debtor book, and the changes it has made in response to the new regulatory environment, means lower credit issuance to come with a knock-on impact on N Brown’s future sales growth.
‘Whilst an unwelcome surprise, we applaud N Brown for updating the market promptly and recognising the reality of said recent and forthcoming regulatory changes,’ commented house broker Shore Capital this morning.
PROMOTIONS IMPACT CHRISTMAS
Over the 18 weeks to 4 January, N Brown did manage to deliver continued digital revenue growth, flagging particular strength in womenswear.
Unfortunately, product revenue fell 4% as the digital retailer continued with the managed decline of legacy brands.
Chief executive Steve Johnson put a positive spin on things, insisting his charge is ‘making good progress with our ongoing strategic review and look forward to providing further details at our full year results in April. Our work so far has highlighted the need to have a tighter brand portfolio, a sharper focus on product and a cost base appropriate for delivering sustainable digital growth.’
READ MORE ABOUT N BROWN HERE
Shore Capital complained that the update ‘surprises us with notably lower guidance on gross margins’ in both the clothing product and financial services businesses, ‘only partially offset by lower operating costs’.
The broker slashed its full year 2020 pre-tax profit estimate by 16% to £70.2m and its 2021 forecast by 20% to £70.3m. Based on Shore Capital’s flat ongoing dividend forecast of 7.1p, the uncertainties facing N Brown are reflected in a high dividend yield approaching 7%.
