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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