Numis says N Brown deserves to trade at a discount

Broker Numis downgraded N Brown to 'hold' from 'add' after again being disappointed in having to cut the specialist clothing retailers' forecasts.

Numis said the 2016 results were 'relatively solid' but downgrading numbers seemed to be the "new normal" at N Brown, with forecasts lowered in May 2014, October 2014 and March 2015, and April's prelims heralding a meaningful cut to the new financial year's estimates.

"Nevertheless, with a number of substantial tailwinds, including positive product momentum brought in from the end of FY15, price investments, bought-in gains, optimised marketing, and some weak comps, we cannot help but feel the business should have been making profit progress this year," the broker said.

Profit before tax estimates for 2017 have been trimmed 8% to £85m, citing the "undoubtedly challenging" current trading environment and pressures to gross margin from a £3m forex headwind and aged stock clearance.

"We question why the FX headwind has suddenly emerged as a significant factor," said analyst Andrew Wade, who also noted this was adding to the board's "repertoire of downgrade explanations", including price investments, the weather, 'bridging the gap' on website look and feel, losses from store openings, marketing phasing, and lower growth in credit sales.

He wondered if, following management's guidance to double-digit growth two years ago and hopes for 30% gains in market share, were more to do with a lack of top-line traction and the underperformance of non-core brands.

Recognising that CEO Angela Spindler has made significant progress in entirely modernising the business, upskilling the workforce, changing the culture, improving systems and processes, and building a business fit for retailing today, as well as acknowledging that investments in brand awareness, pricing and systems have the potential to drive growth, Wade remains slightly sceptical, with high debt ratios also a concern.

"The continued downgrades remind us once again that this is a business which should trade at a discount to the sector - bad debt, weak free cash generation, lower quality brands - particularly in the absence of any margin recovery story - as broadly acknowledged by management."