N Brown dives again amid fears for 10% dividend yield

by from interactive investor |

One of the most eye-popping dividend yields around could be a trap, we're warned. Graeme Evans talks us through N Brown's latest dive.

On a day when the retail sector is rightly focused on the 99% slide in profits at bellwether John Lewis, it would be easy for investors to overlook events unfolding at catalogue and online fashion business N Brown.

Having ousted Angela Spindler as CEO yesterday, shares in the Manchester-based company fell 10% today amid heightened City fears about the future of its dividend, which currently yields a sector-beating 10%.

The jitters were reflected in a note from Stifel, whose analysts said Spindler's departure increased uncertainty at a time when sales growth momentum is slowing. They removed their 'buy' recommendation and 345p target price, while also cutting their expectations for full-year pre-tax profits by 4%. They now rate the shares a 'hold' with 141p target.

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Brown held the dividend in April's full-year results, but Stifel is worried going forward. The next scheduled update from the company will be interim results on 11 October.

The company's so-called power brands - JD Williams, Simply Be, Jacamo - have been doing well, but the same can’'t be said for its legacy brands where results are mixed. This has eaten away at profit margins.

Stifel added today:

"The company has underperformed as the result of increased competition, with the fast fashion retailers tapping into N Brown customer segments."

The stock trades at a 7x 2018 calendar year price earnings (PE) multiple, which is not only undemanding but also a significant discount to the sector.

Source: TradingView    Past performance is not a guide to future performance

Stifel said:

"The share price is pricing in the challenge ahead to beat strong comparatives from last year and it is creating pressure to the top line to pick up the pace in the second half."

While the group can rely on new financing facilities up until September 2021, Stifel said "we see the dividend, at least in time, being at risk".

The imminent departure of Spindler after five years in the job comes as chairman Matt Davies looks for a "new leader who can take the business forward through the next phase of its development".

Spindler has led the online transformation of the business, as well as dealt with major legacy issues and challenging trading conditions. She will be replaced in the short term by N Brown’s financial services boss Steve Johnson.

N Brown shares have fallen sharply in the past year, having stood at more than 350p in early October. They are currently at 136p after today's 10% fall.

Only last month, Peel Hunt raised its recommendation on the company to 'add'. They noted that if shareholders receive the same 14.23p they did in the year to March 2018, and if the share price does achieve Peel Hunt's downgraded target of 225p, shares would still yield over 6%.

Today's share price slide for N Brown was mirrored elsewhere on the London market after news that John Lewis Partnership made underlying profits of just £1.2 million in the six months to July 28. Sales were up 1.6% to £5.5 billion.

Worryingly for the rest of the sector, chairman Sir Charlie Mayfield said gross margin has been squeezed "in what has been the most promotional market we've seen in almost a decade". 

He said ongoing Brexit negotiations made forecasting particularly difficult, with profits for the full year expected to be substantially lower than last year.

With department stores bearing the brunt of the retail downturn at the moment, Marks & Spencer shares topped the FTSE 100 fallers board with a 3% decline. Debenhams, which rose yesterday on speculation of a tie-up with House of Fraser, fell back 10% to just 12p.

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