Yahoo Finance N Brown leans on finance arm as discounting props up sales
N Brown, the group behind the plus-sized Simply Be and Jacamo fashion brands, is having to lean more heavily on its credit business to meet profit forecasts after it cut prices to woo more shoppers.
Angela Spindler, chief executive, said that the company had taken action to discount its ranges after realising that "customers were feeling the pinch" as household budgets faced a squeeze. As a result the retailer invested in targeted, online promotions to encourage shoppers to open their wallets.
The discount strategy seemingly worked, lifting group sales by 3.2pc over the 18 weeks to January 6 at a time when other fashion brands suffered dismal trading. The sales growth was largely driven by a 14.5pc rise in Simply Be sales, helped by the popularity of its wider fitting thigh-high boots and demand for sparkly going out dresses over the festive period.
However, as a result of its promotional strategy, gross margin is expected to be as much as 120 basis points lower to 250 basis points.
Shares in N Brown tumbled by 15pc to 236.8p in midday trading as investors were spooked by the lower product margins.
"It is unsurprising that N Brown feels compelled to participate in promotions in an attempt to capture its share of squeezed shopper budgets, however discounts must be controlled so the brands are not devalued and to ensure customer willingness to still buy at full price," said Sofie Willmott at Global Data.
N Brown said that it would still meet City profit forecasts because of the strength of its finance arm, which offers customers the ability to stagger their payments for goods.
Margins in N Brown's financial services arm are expected to improve to as much as 550 basis points, compared to a guidance of 100 basis points, after the group had the lowest level of arrears in its history. N Brown has also lowered the cost of minimum payments for its customers to make its service more affordable.
Ms Spindler said that its finance arm helped to "add resiliency to our business and more options for customers".
"As well as reducing the rate of balance repayments for some customers, this has also improved the accounting credit quality of the book, as more customers pay the minimum level and therefore provision rates are lower – a virtuous circle," said analysts at Peel Hunt. "Some of this gain will reverse next year. It’s hard to view this as a customer benefit rather than margin enhancement for its financial services arm."
The N Brown boss said that she expected the retail market to continue to be tough but argued that online retailers would have an advantage over the high street because they could offer discounts to select customers and switch their marketing spend to promotions without facing the fixed costs of bricks and mortar stores.
"We are able to take a more flexible approach and can invest in offering value for money in the ways that are most relevant to our customers, rather than a blanket in-store promotion to all shoppers who might have been willing or able to buy at full price," she said.
Around 74pc of N Brown sales are now online following Ms Spindler's turnaround strategy to shift the business away from its catalogue model.
