In tough economic conditions like these, not even the niche retailers can avoid the washout being felt across the retailer sector.
N Brown Group (LSE: BWNG), a specialist in the plus-size and older age group clothing segments, owns Jacamo and Simply Be and is a perfect example of this. The small-cap put out a string of disappointing updates in 2019, the latest of which in October saw reporting a 5.4% revenues slip in the six months to September.
I was quite surprised to see an 80% share price explosion over the course of 2019 and was fearful that a buying bubble was being created. My concerns came to pass on Thursday following a shocking update that sent the retailer’s share price plummeting 25%. And I worry that this could be the start of a long-term downtrend.
A world of pain
N Brown’s share price has come crashing down after its decision to slash this year’s profit guidance and warn of prolonged problems for the bottom line too.
Pre-tax profit of between £70m and £72m for the fiscal year to March 2020 is now expected. This is short of consensus estimates of between £78m and £84.1m, caused by “lower financial services revenue and a highly promotional market,” apparently, as well as a lower-than-expected benefit from its IFRS9 non-cash provision estimate.
This would represent a marked slump from the adjusted pre-tax profit of £83.6m in fiscal 2019, and perhaps shouldn’t come as a surprise given the sustained pressure on the top line. N Brown saw product sales drop 4% in the 18 weeks to January 4, it said, while revenues from its credit services division dropped 4.6% year on year, a reflection of reduced product revenues and recent changes to its lending criteria.
But the bad news does not end here. N Brown advised that due to a “reduced scope for bad debt provision improvements, combined with industry-wide regulatory changes,” that adjusted pre-tax profit for fiscal 2021 would likely come in at similar levels to the current year.
Worse to come?
N Brown has thrown the kitchen sink at changing from a store and mail-order retailer into an online leviathan, and the firm now generates more than four-fifths of product revenue from the internet. But in an environment of dire consumer confidence and intense competition in the clothing market, these efforts have counted for little.
The size of the downgrade that N Brown made to its margin estimates today illustrates the mountain that it has to climb just to stay alive. Product gross margin is now anticipated to fall between 125 basis points and 175 basis points this year versus the fall of between 50 points and 150 points it had previously tipped. And it’s likely that it will remain locked in a programme of extreme price-slashing for the foreseeable future as Brexit uncertainties persist, a problem that could throw those insipid profits forecasts for next year off course too.
So forget about N Brown’s big 6.7% forward dividend yield, I say, as well as its tiny forward P/E ratio of below 5 times. This is a share I won’t be touching with a bargepole.