N Brown is taking crucial steps in its transition to being a pure-play online retailer (currently 77% of sales) and to strengthen its leading position in the under-serviced market for fashionable plus-size apparel. While strategic updates may be on hold until a new CEO is appointed, the company closed the loss-making portfolio of high-street stores in H119 and further brand consolidation seems inevitable. The shares trade on a low FY19e P/E of 5.5x and yield 7.2%.
N Brown is a leading retailer of apparel, footwear and homewares for plus-size and other under-serviced niche customer groups. 77% of goods are sold online. OECD data report that 27% of UK adults are obese; among the highest rates in Europe but behind the US at c 40%. In our view, N Brown is differentiated in its design of flattering and fashionable clothing for this significant demographic. However, as evidenced by recent poor performance, including a 3.1% fall in product sales and a 5.0% fall in pre-tax profits in H119, past strategic decisions have eroded its competitive edge. The CEO of five years departed in September.
The company has reinforced its commitment to online by closing the loss-making portfolio of 20 stores in H119. It has also reduced the number of brands, from c 30 to 11 over the past five years, and we believe that further consolidation is inevitable. The three ‘power brands’ (Simply Be, Jacamo and JD Williams) are now the focus for the c £160m annual marketing spend, with online penetration rates of 90–95%. International expansion has been narrowed to the US, where we believe the plussize market to be fragmented and lacking a fashion focus, and Ireland.
The FY20e consensus PBT has reduced by c 8% to reflect a recent draft ruling on irrecoverable VAT on financial services-related marketing expenditure. In FY19e, the company expects to offset any impact through cost savings and protective payments to HMRC mean that a further negative cash impact is unlikely.
The shares have declined by c 60% this year and trade on an FY19e P/E of just 5.5x. With fresh leadership and a clear strategy, N Brown has solid foundations from which to grow market shares. The rebased dividend yields 7.2% and H118 core net debt of £30.5m represents an EV/EBITDA multiple of 0.3x.
