Online fashion retailer N Brown (BWNG) delivered ‘another record breaking Christmas’.

So why has today’s festive update sent shares in the self-styled ‘expert in fashion that fits and flatters’ tumbling 15.7% lower to 235p.

Investors are focusing on a material slowdown in third quarter sales, while downgrades to the margins N Brown makes on clothing products are also weighing on sentiment.

Getting far less attention is an exciting new partnership to sell its Simply Be and Jacamo brands via online fashion platform Zalando, or that its USA business is back in positive growth.

POWER BRANDS' POSITIVE SHOWING

CEO Angela Spindler reports 2.7% product growth for the 18 weeks to 6 January, with all three of Manchester-based N Brown’s ‘Power Brands’ - JD Williams, Simply Be and Jacamo - posting positive sales showings.

Shares views this as a robust turn from N Brown, which focuses on larger customers and the underserved age 50-plus demographic, given the tough festive clothing market conditions and warm October weather that crimped Christmas profits at Marks & Spencer (MKS) and Debenhams (DEB).

TOUGH COMPARATIVES

Yet this compares with the impressive 5.9% product revenue growth generated last year and the 7.5% growth witnessed in N Brown’s first half year, hence the shares are on the back-foot this morning.

Says Spindler: ‘Simply Be was our standout brand, up 14.5%. We saw strong progress across our key strategic indicators, with online revenue up 9%, Power Brand revenue up 7.3% and the USA up 22%. The fashion market remains competitive and we invested in promotional activity across our brands and product categories, which successfully delivered market share gains.’

Furthermore, Shore Capital notes ‘with encouragement from a more strategic perspective the announcement of a new partnership with Zalando, so further increasing Simply Be and Jacamo penetration into Europe, building upon recent launches with ASOS (ASC:AIM) and Amazon too. We would expect medium-term benefits from these respective tie-ups.’

However, revenue from Secondary Brands, which include lingerie business Figleaves and also Fashion World, fell 8.4% as N Brown diverted marketing spend into Power Brands.

Its Financial Services business ‘continues to perform strongly’, enabling N Brown to leave overall profit expectations unchanged, although Spindler also expects ‘the shape of our results to be different than previously anticipated, as reflected in our revised guidance’.

Due to higher promotional activity in a tough market, full year product gross margin is now expected to decline by 225-to-250 basis points, versus previous guidance of a 70-to-120 basis point drop.

Thankfully, with the quality of the customer loan book growing, gross margin guidance for the Financial Services business is upgraded and N Brown continues to keep a lid on costs.

FORECASTS MAINTAINED

Accordingly, Shore Capital feels able to leave its profit before tax (PBT) forecast for the year to February unchanged at £81.2m (2017: £80.6m) and maintains its 2019 estimate for an £83.4m PBT haul.

For the current year, Shore forecasts earnings per share of 21.7p and a flat dividend of 14.2p, leaving N Brown trading on a plump dividend yield of 6% following this morning’s price reverse.

The broker argues: ‘N Brown is now a demonstrably digitally led retail group and whilst not a same-for-same comparator to pure-play operators, the nature and extent of its activity is perhaps undervalued by the market.'

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