Online clothing and footwear retailer N Brown (BWNG:AIM) has warned soaring inflation and rising costs will crimp earnings in the year to February 2023, prompting significant downgrades to earnings forecasts from analysts and sending the shares 19% lower to 29.1p.
Downwards revisions overshadowed the reassuring news that results for the year to February 2022 will be in line with expectations, including adjusted EBITDA in the £93 million-to-£96 million range after the digital retailer delivered ‘pleasing’ strategic product brand growth of 9%.
HIGHER COSTS BITE
Due to the ‘escalating and fast-moving inflationary environment’, N Brown now expects adjusted EBITDA for full year 2023 will be similar to the £86.5 million generated in full year 2021, before growing again ‘as the macroeconomic headwinds recede and the group’s strategy is executed’.
Manchester-headquartered N Brown, behind the JD Williams, Simply Be and Jacamo brands, warned that inflationary pressures will be higher for longer in freight and that it is also contending with elevated fulfilment and rising wage costs.
N Brown is taking action to mitigate these inflationary pressures, though the need to continue investing to grow key brands means an increase in the cost to sales ratio is expected this year.
SHARP DOWNGRADES
As a result, Shore Capital downgraded its 2023 EBITDA forecast by 16% to £86.8 million and its pre-tax profit estimate by 30% to £33.9 million. The broker also lowered its 2024 estimate on the news, slashing next year’s EBITDA forecast from £115.8 million to £93.8 million.
Turning to the consumer backdrop, N Brown explained customer demand is normalising following the easing of the most recent Covid restrictions with clothing driving demand and customers moving back into categories such as dresses and formalwear, although it assumes softer conditions in the online home market will continue.
ROBUST BALANCE SHEET
Chief executive Steve Johnson commented: ‘We enter the new financial year with continued confidence in our proposition. We are not immune to the supply chain and inflationary cost pressures being seen across the wider market, however, we continue to take proactive actions to offset these and mitigate the impact on our full year 2023 performance.’
N Brown also stressed that a ‘robust’ balance sheet positions it well to rebuild profitability, having closed the financial year with net debt of around £260 million and available liquidity of more than £200 million.
THE SHORE CAPITAL VIEW
Shore Capital commented: ‘Clearly, any downward revision to forecasts is unwelcome but we applaud N Brown for its decision to guide early for full year 2023 rather than simply hope that things improve when cost trends have been fast-moving and deteriorating.’
The broker also believes that N Brown is ‘correct not to throw the baby out with the bath water in terms of seeking to protect short-term profitability set against a rapidly rising cost base, and so persist with ongoing strategic work to improve the operating performance of its product and financial services proposition, which at the end of the day is the lifeblood of the business and its investment thesis.’
