N Brown plummets as dividend halved

A 10% yield should always set alarm bells ringing, so today's decision by N Brown is no surprise. Graeme Evans discusses what happens next.

As the warning signs were flashing, income investors shouldn't be too surprised that shares in 9%-yielding N Brown turned out to be a dividend trap.

In today's interim results, the fashion retailer slashed the half-year pay-out by 50% to 2.83p in a bid to rebase the dividend to a more sustainable level “from which we will seek to grow”. The full-year divi will be cut by a similar level.

Current dividend cover was low and further exceptional items, largely relating to legacy matters, meant that distributions were not covered by free cash flow.

N Brown is also facing much uncertainty, including over how quickly it can drive the transition from catalogue to higher margin online revenues. In addition, it is without a permanent boss following the departure of Angela Spindler last month.

Shares slumped by another 22% today to leave the stock at its lowest level since 2004. In our recent piece covering Spindler’s exit, we highlighted the fears of analysts at Stifel, who thought the dividend was at risk.

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Today's events still leave N Brown with a healthy 6% dividend yield and plenty of goodwill in the City, particularly as so-called power brands such as Simply Be and Jacamo continue to do well. In its financial services arm, which allows customers to pay for product purchases on credit, revenues were up 12.7%.

The problems have been caused by the sales and margin performance of some of its lesser brands, as well the group's catalogue-based offline business.

Analysts at Jefferies think the stock now looks inexpensive, although this view wasn't enough to stop them removing their previous ‘buy’ recommendation and cutting their price target from 346p to 145p.

Jefferies said:

"N Brown is taking some decisive actions under the leadership of interim CEO Steve Johnson. However, it appears likely the stock will be in limbo, despite balance sheet strength, ahead of the appointment of a new CEO."

Source: TradingView (*)      Past performance is not a guide to future performance

Management updated their full-year guidance on a range of benchmarks in today's results, although Jefferies said this had little bearing on the overall pre-tax profits consensus. They cut their own forecasts by between 3% and 4% for the next three years, leaving the broker broadly in line with the market.

New exceptional items announced today by the company included £22.4 million in respect of customer redress provisions relating to PPI claims. With one-off costs amounting to £65.4 million, N Brown racked up a bottom-line loss of £27.1 million for the half year.

The company admits it faces a short-term revenue hit from falling catalogue sales, but adds that this presents an opportunity to drive profit growth through improved efficiency as more sales are achieved online.

The company said:

"While first half trends seen in our product business are continuing into the second half, the continued positive outlook for financial services and scope for further efficiencies mean that our full year expectations are unchanged."

The group, which saw underlying profits fall 5% to £30.6 million in the half year, has available financing totalling £625 million, including a securitisation facility of £500 million until September 2021.

*Horizontal lines on charts represent previous technical support and resistance. Diagonal red line is downtrend since 2017.