Investment Column: N Brown fall not as bad as it seems

the investment column

N Brown, the Manchester-based mail order group, has been one of the most reliable performers in the retail sector over the past few years.

So it was surprising to see the shares dip yesterday on news of a fall in operating margins in the first half.

Though that ratio slipped to 12.8 per cent compared to 13.4 per cent in the first half last year, the news was not nearly as bad as first appeared.

Though the 12.4 per cent increase in first-half profits to pounds 18m did not match the 19 per cent sales increase, the reasons were more about investing in future growth than short-term problems.

Net margins were affected by a significant and planned increase in the number of new customers attracted to the group's raft of catalogues.

New customers are loss-making for the group in the first year as their spend is low compared to more seasoned shoppers. They only start to become profitable in years two or three, so seeds sown now will be reaped in 1998-99.

Second, the company now fulfils around 30 per cent of its deliveries via its own couriers, which gives it greater control, but has come at a cost of pounds 500,000.

Like-for-like group sales rose by an impressive 19 per cent on last year. Current trading since the end of the half has not been so good, but that includes a flat two weeks as a result of the shopper apathy which followed the death of Diana, Princess of Wales.

Other mail order groups are understood to have experienced the same. N Brown's sales have recovered in the three weeks since the death.

Jim Martin, N Brown's chief executive, is continuing his strategy of recruiting more shoppers in the 30 to 40-year age range to the catalogues whose core constituency has historically been the over 50s.

The younger group now accounts for 19 per cent of group sales, 29 per cent ahead on last year. The company is also investing pounds 20m this year on warehouse expansion and computer upgrades.

No acquisitions are on the horizon, the company says, though a return to the Freemans deal is always possible if the competition authorities block Littlewoods' purchase from Sears.

On full-year forecasts of pounds 42m the shares, down 5p to 412.5p yesterday, trade on a forward ratio of 21 times.

That is a 20 per cent premium to the market, but given the shares were rated at a 40 per cent premium a year ago, they are starting to look good value.