N Brown – Investment First Look


Topics covered are as follows:

  1. Some basic insights into N Brown Financial Services.
  2. An interpretation of N Brown 2017 results.
  3. A five-year review of N Brown.
  4. (Important!) A breakdown of N Brown growing Intangibles assets. (Possible over capitalising of expenses)
  5. A detailed look at N Brown Financial Services.
  6. If something is wrong with N Brown why is the company able to maintain dividends for so long? (details down below under “Further Thoughts.”


Introduction and revenue breakdown

N Brown is a multi-channel retail seller. Here is the revenue breakdown, category by category: –


That divisional breakdown makes for some interesting read. One thing stood out: Financial Services.

And it is interesting because it contributes 30% of total group revenue.

Why should you pay attention to this segment?

Because retailers offer credit for their customers to make purchases. In return, the customers pay N Brown back with interest.

The FT investigated N Brown in 2016 and found it hiked credit rates from 44.9% to 58.7%.

Here is a simple example if you use N Brown’s financial services: –

Say you buy £250 of clothes from N Brown by using credit. And you pay them back a year later. Assuming the APR is 58.7%.

You pay N Brown a total of £396.75.

It’s like you bought a coat for £60 on credit and pay them back £94, that an extra 35% on top of the selling price!

Remember that extra £137 (from the above example) is treated as revenue on N Brown’s P&L account.


N Brown is facing penalties from “Mis-selling its financial services.” It is part of the reason why the shares collapsed by 60%.


More on that down below later.


N BROWN 2017 Results

N Brown received the highest accolade on its customer service score from the Institute of Customer Services.

N Brown should get an award for mounting complaints from the Institute for Financial Services.

Okay, onto the results of 2017.

Given that exceptional costs came of £25.2m  from litigation charges, the company made £44.3m from £54m last year, giving an EPS of 15.67 pence per share.

N.B.: The latest results cover 53 weeks!

Skimming through the balance sheet numbers. Everything looks hunky-dory, with nothing suspicious standing out.

Now, to the cash flow statement. Free cash flow reported is £46m, up from £6.3m last year (see table below), the highest in five years.


But a closer would reveal N Brown made some accounting adjustments. They recorded “taxation received” of £1.9m, despite paying £13.3m in accounting taxes.

Last year, N Brown record £22.4m in tax payment in CF. statement and £17.3m in P&L statement.

That helped them to boost net cash earnings.


Guidance 2018

-Net Debt will rise to £300m-£320m from £291m.

-Gross Margins on products to fall by 0.2% to 1.2%, while financial services are flat or 1% higher.

-Capex at £40m.

-(Important): Group operating costs will rise by 3.5% to 5.5%, this will squeeze profits.



N BROWN’s Previous five-year review


(N.B: Key data highlighted in RED and I didn’t include the latest 2017 results on the table)

Results look pretty normal for N Brown Group. There are a few noticeable changes in intangible assets and capex. Both saw big increases in valuation and spending.

That had free cash flow generation declining to £6.3m. It’s the main reason why total debt rose from £259m to £335m in maintaining its dividends payout.

(P.S. So, we are led to believe.)


Operating margins were around 13% and are firmly below 10%. Meanwhile, net margins saw 400 basis points declined. That didn’t played well with N Brown efforts of increasing EPS, in which it fell to 20 pence per share.


If we look at the interims:



Operating margins decline is greater during the Spring/Summer period. A quiet period of trading.


Untangling N Brown’s Intangibles – Exceptional costs on the Horizon

(IMPORTANT!) Looking back to the increase in N Brown intangibles growth. Most of that spending went to upgrading its system, known as “Fit 4 the Future.”

The system is coming to effect in 2018, also it is part of the Course of Construction (which is exempt from depreciation). 

In 2016 annual report, N Brown mentions the system upgrade would be ready later that year. Also, the company gave these amortisation periods: –

  1. F4F Development Project; – 7 years (apparently not till 2018);
  2. Software; – 5 years;
  3. Customer Database; – 5 years (minor intangible value of £1.9m).

No such details were given in today’s results.


Probability: N Brown could be overcapitalizing their expenses. Search for “course of construction” in the notes.

Again, that portion is not depreciated.

Investigating further, the table shows N Brown’s amortisation charge vs. mine.

(N.B.: N Brown states amortisation period is 5 years meaning a 20% rate. Also, you should ignore brands and customer database intangibles because both are fixed at £16.9m and £1.9m.)

n brown intangibles table

Below is the interpretation of N Brown’s Intangible Assets.

But, first here is a screenshot of N Brown’s intangibles accounting policies:


This is the original N Brown’s intangibles and charges.

 N Brown intangibles Originals


But if one does their maths probably, they would use common sense.

For example, in 2013, N Brown’s software original cost is £146m. After deducting Courses of Construction of £12.4m. The amortisation portion is £133.6m, then the amortisation charge is £133.6m multiply by 20% = £26.7m.

But, N Brown charges £11.1m. A difference of £15m.


Real amortisation charges for N Brown

The difference in N Brown amortisation charge and mine looks vast. And since 2012, N Brown could have understated its charges by £112m.

Then you have the non-depreciated assets “Courses of Construction” growing exponentially. Leading to suspicions of over capitalizing expenses.


N Brown Intangibles not depreciated

Does it take this long to bring software into operations?

Also, N Brown revenue has not been growing at the same pace as its intangible assets. If you take intangible assets and sales to make intangible asset turnover, you get this:  


N Brown intangibles asset turnover

If N Brown depreciates its assets, then the value of its intangibles should fall. By under amortising their assets, it slows its turnover. That could question the quality of their shareholders’ equity.


N Brown’s Intangible Assets – What happens next?

Assuming 2018 is the date when new software upgrade becomes operational, a jump in amortisation charge is inevitable.


Original Software cost is £294m from today’s results. Management says 2018’s guidance is £40m capex. Assume 90% goes to intangibles (following last year distribution), then the Original Software Cost comes to £330m.

Assume Course of Construction rise to £105m from £88m (rough estimate).

How much does the amortisation charges rise?

From 2016’s annual report, N Brown has stated the amortisation period is seven years, a rate of 14.2%.

So, £105m multiply by 0.142 = £14.91m.


N Brown Financial Services

The FT investigation into N Brown credit policies reveal some startling details.  Apart from charging customers 58.7% per annum APR.

So, how is N Brown able to pay dividends and increase capex spending at the same time.

The answer is from its financial services. My recent analysis of NEXT PLC, tells me their secret sauce to achieving high operating margins. Here are some numbers from NEXT PLC: –

-Credit Card APR = 25%;

-Interest fees made = £170m.

The interest fees made requires little start-up capital.

So, why is N Brown struggling to make decent profit margins? Here are some facts: –

-£260m from interest, higher than NEXT PLC;

-Charge 40% APR, see JD Williams website.



An article from The Business Desk, a fortnight ago estimate this miss could cost N Brown up to £24m. Even worse is complaints from customers are trickling in fast and could last to 2019.



Further Thoughts

The share price might have risen by 5% on the release of these results.

But over a three-year period, the shares are still 60% below its peak.

An interesting piece from Phil Oakley of Sharescope says N Brown is interested in credit services, then selling clothes.

Given the outrageous 50%+ APR, I’m inclined that he is right.

And speaking of high APR, we could assume that, its financial services are hiding weaknesses from its core operations and meeting its dividends payments.

Expect more fines to follow, as more customers file complaints of overcharging and misrepresentation.

Higher amortisation charges are likely, due to low amortisation charges reported. That leads to the possibility of a big write down.

Weighing these factors up, this company has too many problems and a lot of unknowns. Also, it is hard to value.

Action: – Avoid the shares.


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The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.

Further Reading

Stock Watch: N Brown” by Phil Oakley.