Shares in N Brown Group (LSE: BWNG) has have tumbled following another profit warning today, while Boohoo.com (LSE: BOO) has climbed after a solid trading update.
In this article, I look ask whether either company is a buy — or whether investors looking for retail exposure are better off with high-performing high street chain NEXT (LSE: NXT).
No tears at Boohoo
Following January’s 40% share price crash, I believe Boohoo.com has started to look like one of the best online retailing plays available to UK investors.
The own-brand retailer has solid profit margins, net cash of £54m, and is delivering sustainable growth: today’s year-end update showed a 31% increase in sales over the last year, based on constant exchange rates.
Boohoo also said that gross profit margins had remained stable last year, at 61%. This is important, as it shows that the firm’s sales growth isn’t being driven by price cutting.
Boohoo shares are up by 6% at the time of writing, and with a 2016 forecast P/E of 23, I think they remain reasonably priced.
N Brown down (again)
It wasn’t such a positive story N Brown, which owns brands including Simply Be, Jacamo and Figleaves. The firm issued its second profit warning in six months today, sending its shares down by 14% during the first hour of trading.
Group sales were flat overall in 2014/15, but profit guidance has been cut again: in October, N Brown cut pre-tax profit guidance to between £88m and £92m. Today, the firm said that the true figure will be “slightly below” £88m.
N Brown is in the middle of a programme of improvements aimed at strengthening the group’s online offerings, which now account for 62% of sales. However, today’s update revealed that fourth quarter sales growth had been driven by price cutting — suggesting to me that Brown’s attractive 12% operating margin could be under threat.
Better buy Next?
Investors should perhaps remember the old adage that profit warnings come in threes: in my view, N Brown doesn’t yet look cheap enough to be a bargain, although the 2016 forecast P/E of 12.6 is starting to look interesting.
However, I think I’d rather own shares in high street stalwart Next, which boasts a 20% operating margin, an identical 3.6% dividend yield, and a long-running track record of earnings growth and superb financial guidance.
Overall, I rate Boohoo and Next as buys in today’s market, but not N Brown.