Broker snap: Change of upgrades at N Brown only small, says Citi

10th Oct 2013 09:55

Citigroup has retained its 'neutral' rating and 488p target price for online and catalogue retailer N Brown following its interim results, choosing to sit on the fence with the stock trading at 14 times earnings.First-half profit before tax came in at £45m, some 3% below Citi's forecast (£46.3m) due to a worse-than-expected margin performance, which offset better like-for-like sales growth. Earnings per share (EPS) rose 0.6% year-on-year to 12.56p.The US bank said that strong top line growth at N Brown is being predominantly driven by Home & Leisure sales with little sign of improvement in the core Womenswear category. Meanwhile, operational leverage is being held back by higher bad debt charges from aggressive customer recruitment. This, as well as ongoing investment, is offsetting any near-term benefits, resulting in a "muted" EPS compound annual growth rate of just 3% over 2013-2016."The interim results were the first opportunity for new Chief Executive Angela Spindler to give some thoughts on the business and strategy. We came away still thinking the investment debate hinges around further clarity on a number of fronts," Citi said.On the one hand, the bank said Spindler brings "fresh thinking" about consolidating sub-brands, focusing marketing around key brands, concentrating international efforts on the US and improving the display of products."However, the overview was not enough for us to form a fully informed view on how N Brown's strategy is likely to develop. We do think that without deviation from the current path the chance of earnings upgrades is slight given the lack of operating leverage being seen in the business despite accelerating top line trends."The stock was down 5.85% at 460.4p by 10:27 on Thursday.BC