Peel Hunt downgrades N Brown after clothing margins cut

Broker Peel Hunt downgraded N Brown to 'reduce' after the specialist fit clothing retailer ran into challenging conditions in the new financial year.

Final results were also slightly disappointing, with profit before tax of £84.5m, which was below the broker's £86.2m estimate, though the dividend of 14.2p was held steady.

The operator of the Simple Be, Jacamo and JD Williams retail fascias then said sales had slowed year-on-year since March and warned of a £3m hit to full year profit before tax from currency headwinds.

For the new financial year, the company gave guidance that product gross margin would fall between 50-150bps driven by buying in gains, more than offset by FX headwind, clearance of aged inventory and tactical price activity to drive share growth in a challenging market.

Financial services gross margin guidance was for a +50bps to -50bps, with the ongoing improvement in the credit book broadly offset by the impact of new customer recruitment.

Group operating costs are expected to be up 2% to 4%, with depreciation and amortisation of £29-30m, net interest of £8-9m, capex of £38-40m, a tax rate of circa 20% and exceptional costs of circa £2m linked to the ongoing tax disputes with HMRC.

Peel Hunt said taking lower gross margin guidance and cutting its sales estimates, it expected to downgrade PBT in the new 2017 financial year by at least £10m to £81.1m, resulting in 23p earnings per share.

"The shares offer a decent yield, nearing 5%, but are struggling to get traction, we find ourselves downgrading forecasts again with little confidence in the turnaround," analysts said.