Hot Features
Premium
Register for Free to get streaming real-time quotes, interactive charts, live options flow, and more.
Last week’s Newsletters showed good quantitative metrics for N Brown (LSE:BWNG): a cyclically adjusted price earnings ratio of around 11; low probability of financial distress, and; very good returns on net tangible assets.
But why does it have such an impressive return on capital? I start to answer that today by examining the business model.
Developed over decades the model gives it a degree of customer captivity; its long-established relationships encourage customers to develop habits of buying through catalogue and online.
Half of them also get into the habit of signing-up to pay for the clothing, footwear and homewear items over a period of 18 months (which regularly gets extended as new items are added to the outstanding balance). With interest rates at an APR of 58.7% the company makes a significant proportion of its profits from its Financial Services division, perhaps half.
Where it all began
Back in 1963 Alliance Brothers Ltd, led by David, now Baron, Alliance, bought the catalogue company James David Williams.
Lord Alliance is most famous for his control of another company, Coats Viyella. Now aged 84 he is worth over £3bn. His 34% stake in N Brown is around a twelfth of that. Nigel Alliance, 81, a brother, owns a further 11% of N Brown.
Over 40 years, other catalogue companies and retailers were purchased and folded into N Brown.
It has many brands, but the focus of each is on a section of the fashion-buying public ignored by mainstream retailers. In particular, it targets the niches of clothing for larger people, the plus-size segment (size 20 and above), and the over-50s looking for fashion.
By being clearly identified as specialists in serving bigger and older customers it generates customer loyalty. For example, one of its brands is High and Mighty. If you are an exceptionally tall or broad man then the mass market high street retailer cannot help you – a specialist is needed.
Other valuable brands include Simply Be for fashion conscious younger women who need well-fitted stylish large-sized clothing; J D Williams for the 50+ customer, and; Jacamo, for men ranging up to a size 5XL. More detail on the brands in tomorrow’s Newsletter.
Growth prospects
Demographic trends are toward a greater proportion of the population being older. Size trends (people are getting bigger) indicate that N Brown’s market segments will grow. It has the incumbent’s advantage in being long-recognised for its expertise, the depth and breadth of its range.
Online
Despite its catalogue origins, and its intention of continuing to serve many of its customers through catalogues, its most powerful brands are now online-led. Overall 69% of sales are online, with 77% of recent new customers preferring online shopping to catalogue. To entrench further its “digital-first” push it is investing tens of millions in a new IT system.
eCommerce has the distinct advantage over catalogue of allowing N Brown to adjust its offering quickly, e.g. new dress trends, or lowering Christmas prices. Catalogues mean commitment to stocking the full range for months, whereas at the start of a season J D Williams, for example, only commits to 45% of the range. It can then introduce more lines as the season roles on. This tactic is helped by reduced lead times through sourcing more from Europe and the UK.
Online also allows its websites to carry product from other retailers, such as computers or TVs, to extend the offering. Over 100 new third party brands have been added since March 2016.
Vica-versa, other websites can carry N Brown’s products, e.g. Asos and Tesco Direct sell collections of Simply Be and Jacabo lines.
Digitalisation of two-thirds of the business permits the building up of modern skills allowing some competitive edge due to the resource of holding a large database of 4.3m active customer accounts: data analytics, personalisation of the offer, conversion optimisation (increasing the percentage of visitors to a website who end up being customers).
Stores
It has only 23 physical stores (15 Simply Be and Jacabo combined stores, 8 High and Mighty). But in among them there are many “underperforming” outlets – total store revenue is only £23.1m (out of total product sales of £636m), producing operating losses of £2m.
However, the stores assist the profitable online businesses:
•Act as advertising boards, especially useful for showcasing new products
•Click and Collect locations
•Customers can check out quality and fit (fully trained style consultants and fitters in every store)
•Places to take returns (returns rate is around one-quarter of what is sent out)
In addition there are over 5,000 collection points.
Financial Services
Now we come to side of the business that makes it much more than a conventional retailer. In fact, so important is the profit made on finance that the company might be viewed as a lender first, which entices people to borrow through offering nice clothes on tick.
You could take the argument to the extreme…………………….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
