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N Brown - The business model

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The way I see N Brown’s (LSE:BWNG) business model is that it sells clothes etc., to people at below cost as a deliberate strategy. That is, it makes a gross margin on the items it sells of around 52% (i.e. if it buys a dress from China for £28.80 it sells it to a Brit for £60), but the costs of warehousing, logistics, website maintenance and promotion amount to more than the gross profit.

This pattern is apparent in the last six years – see table.  Take the year ending 2nd March 2019 as an example. It sold £616m of goods to its customers.  From this it had to pay suppliers £295m, leaving £321m in gross profit to pay for warehousing, admin, etc.

But these costs came to £370m (see 10th row in the table) so it made a loss on selling dresses etc., of £49m.

And it produces this sort of loss year after year.  A disastrous pattern, you might think, for a retailer. But this is no ordinary retailer.  There is an alternative lens: it can be looked at as an online financial institution that uses a retail arm to generate financial business – selling clothes is a loss-leader, if you like.

£m (to March)   2019 2018   2017   2016   2015   2014
Product revenue 616 653 627 607 583 593
Gross profit on product (margin) 321

(52.1%)

341 (52.2%) 343 (54.7%) 341

(56.2%)

329

(56.4%)

n/a
Financial revenue 299 270 261 260 254 242
Deduct bad debt -119 -100 -111 -110 -109 -68
Other financial services costs -13 -11 -6 -8 -7 n/a
Profit on sale of customer receivables 11 6
Gross profit on finance (margin) 177

(59.2%)

165 (61.2%) 145 (55.7%) 142 (54.6%) 138 (54.4%) n/a
Total gross profit 498 506 488 483 467 440
Deduct warehouse, marketing, admin. etc. -370 -387 -372 -361 -350 -313
Adjusted EBITDA 128

 

119 116 122 117 127
Deduct depreciation and amortisation -30 -28 -28 -25 -21 -20
Adj Operating profit 98

 

91 88 97 96 107
Deduct finance costs -14 -9 -8 -8 -8 -7
Adj profit before tax 84 82 81 89 88 100
Exceptional items -146 -57 -25 -17 -20 -3
Unrealised FX movement 5 -9 0.2
Statutory profit before tax -58 16 56 72 68 97
Tax -1 -4 -13 -17 -17 -21
Profit after tax -59 13 44 55 51 76

Over the last five years product sales have risen very little, while operating costs have gone from £350m to £370m meaning that the losses on product have increased: £20m in 2015 to £49m in 2019.

And this is before we allow for a swathe of costs being moved from the ordinary accounts into exceptional items. We’ll look at exceptionals later.

Financial Services

Given the on-going losses in selling dresses etc., for

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