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N Brown’s chief executive has spent most of his career at fashion retailer N Brown, and his experience shows

by John Marshall

Alan White, chief executive of fashion retailer N Brown, is confident his company won’t suffer the fate of rival home shopping specialist Findel. When we meet, Findel just issued a shock profits warning on spiralling bad debts sending the shares tumbling almost 40%.

Like Findel, N Brown’s business model relies on extending credit to customers. At a time of record consumer indebtedness and rising personal insolvency, as banks and credit card companies tighten lending conditions, I challenge White that his company might also be vulnerable to rising defaults.

Unruffled, White points out that the company is ‘not seeing any degradation’ in its debt and sets out crucial differences between N Brown and Findel, including an older customer base (typical age 58) which, with smaller mortgages and fewer unsecured debts, is only on the margins of the debt crisis.

Older customers are better off financially and ‘more honourable’, and see repaying debt as a responsibility. ‘Fewer events go wrong’ in their lives says White, who has spent most of his career in home shopping.

The 53-year-old joined the retailer as finance director in 1985. He became finance director at Littlewoods in 1999 but returned to his old employer as chief executive in September 2002.

Since then White stresses he has instigated major systems improvements to protect against bad debts. Since 2005 unreliable debtors have been filtered out using ‘behavioural screening,’ whereby new borrowers are normally limited to £100 credit until they show they can make payments.

Bad debts can dent the bottom line of home retailers, but flagging consumer confidence on the top line can also cause concern. Marks & Spencer recently reported a Q4 fall in non-food like-for-like sales of 3.1% and Next an 8.9% underlying drop in Q1 sales.

True, niche direct retailers to lower-income brackets such as Findel and N Brown can’t be compared with those mid-market but concerns must remain.

Nevertheless, White is confident N Brown’s ‘absolute expertise’ in larger sizes will stand the company in good stead. White believes larger customers are now ‘more comfortable dressing fashionably’. The company has launched several new catalogues to encourage this trend, with Simply Yours for upmarket lingerie and Jacamo for younger menswear. Increasingly ‘more of the range is available in larger sizes’.

Sales have shown little sign of slowing and White is confident of ‘bucking the trend’ with sales growth ‘way above anything else in the market place’. Last year he reported 16% underlying growth in womenswear sales. Menswear sales grew by 24% and footwear sales were up by 12%. Sales in the first eight weeks of this year are ahead by 12.1%, contrasting with other high-street retailers.

White also says demographics favour the group. Over the next five years he says there will be a 7% increase in the group’s core constituency, those aged over 45. Some 38% of women and 44% of men are overweight or obese, he adds, stressing that N Brown is therefore serving a growing market.

White’s confidence is backed by the analysts, who forecast further growth. John Dickinson from independent broker Brewin Dolphin increased his pre-tax profit forecast by £5 million to £82 million following last month’s results giving an EPS forecast of 21.6p. He has a 300p price target. Landsbanki is even more optimistic with an EPS forecast of 23.2p and a target price of 350p. These target prices compare favourably with today’s 245p share price.

Traditionally a catalogue-based home retailer, the company is increasingly becoming an internet retailer. Last year internet sales grew by some 50%. Although the rate of growth has slowed slightly it is still an impressive 40% plus. White believes that within three to four years more than 50% of sales will be generated online. This is in stark contrast with the historical trend, when 80% of orders were taken over the phone.

The largest percentage growth in internet sales is coming from those aged over 65. Once a family member or friend shows them how to use the net, this group quickly adapts, comments White, who adds that net sales to these senior citizens are growing at 55% a year, admittedly from a low base.

As seen in mirror

One of the challenges facing any catalogue/internet retailer is a high level of returns. Often clothes look different when first worn from how they look on catalogue page or screen. White says that N Brown’s 32% return rate puts the company ‘on the low side’ compared with peers and claims that ‘the return rate is lower than a young fashion retailer would experience selling the same mix of product’.

When items are returned the company’s ‘steam ironing facilities refurbish the returned garments so that they are made fit for stock’, so there is only a 2% wastage rate.

Spend up, costs down

White highlights benefits of growing internet sales. The first is purely financial since online orders save 75p by bypassing the call centre. But more importantly the online customer spends £66 while the telephone customer spends on average £53. White believes that the online customer ‘goes online to spend £53’ but then spends more because of the group’s ability to emphasise special offers and its cross-selling abilities. In addition the internet provides a huge marketing opportunity with the company sending 65 million e-mails a year. These are ‘segmented so that they are not regarded as spam’.

As a home shopping company the group clearly needs secure distribution. As one of the Royal Mail’s top 20 customers he managed to renegotiate prices in 2006, giving annual savings of £5 million. Parcelnet, with its 8000 couriers nationwide is responsible for delivering 90% of the group’s orders. White believes that ‘couriers are regarded as postmen used to be – friendly and reliable’. The use of couriers is helped by the fact that most of the group’s customers are in during the day. Normally orders are delivered within three days, although customers can pay a premium for a guaranteed delivery within 48 hours.

Consolidation talk

We move on to the subject of consolidation talk within the home retail sector. Last year Findel’s chief executive, Patrick Jolly, was quoted as saying that he would like to acquire N Brown. White says that he had received a phone call from Jolly explaining ‘he had been given a pointed question’ and that the quote was ‘not quite what he had said’. Although there could be significant synergies by merging these two companies it is clearly unlikely that anything will happen in the short term. However, White does admit that the company is ‘still looking for acquisitions’.

The group acquired Gray & Osbourn in June 2006. This business enjoys somewhat more affluent customers targeting the ABC socio-economic groups (Findel’s core customers are C2, D and E) with an average order of £150.

It is probable that future acquisitions will be aimed at improving the customer mix further. Despite returning £80 million to shareholders last year via a 27p special dividend, the balance sheet is strong, with net debt of £200 million compared with facilities of £329 million, which do not need to be renewed until 2012. This provides White with the firepower for further incremental acquisitions, which can be very profitable.

White is clearly one of the few

retailers who currently have the Midas touch. His concentration on growing niche markets and the increased commitment to the internet should guarantee several years of strong growth while others struggle. He clearly understands the dynamics of the home shopping industry. A good company in a difficult sector.

The writer owns shares in N Brown

Would I buy shares? YES

30 second N Brown

• The business dates back to 1859, when James David Williams started work running three mobile shops and a growing letter order trade.

• In the past 12 months online sales have grown by 50%.

• Lord Alliance of Manchester CBE, a non-executive chairman, was appointed a life peer in 2004.

• The group caters for the fuller figure in its clothing ranges. For men the largest sizes are 70” chest and 64” waist.

• Sold Zendor, its fulfilment services business in December 2007.

• Ivan Fallon, non-executive director, is also Chief Executive of Independent News & Media (UK).

• It owns a 21-acre warehouse site in Glossop.